11 QUALITY STOCKS FOR THE CONTRACTION CYCLE
Credit Suisse says the economy has moved into a contraction cycle. And that means portfolio require adjustment. They use a cycle clock indicator to determine their equity allocation based on the performance of particular sectors during various portions of the business cycle. Based on their work, they provide 11 names that are consistent with a slower growth environment:
“We underline that markets are already pricing in a Contraction phase, and as such, we resist a “knee-jerk” change in asset allocation. More specifically, over the past 7 Contraction phases, equities have on average underperformed bonds by 10% in the six months up to the beginning of a Contraction phase, while cyclical equities have underperformed defensive ones by 8% over the same period, although this underperformance tends to start reversing in the six months after the Contraction period starts.
“In this respect, we highlight our balanced approach to equity sector strategy – and the neutral tactical and positive strategic views on equities as stressed by the Investment Committee.
This week’s recommendation is about quality, relatively safer companies, which tend to perform fairly well in an environment of slower growth. Beyond the usual reasons for defensiveness, we recently found that investing in quality, safer companies is actually a profitable strategy, especially over longer-term investment horizons. For this Research Weekly publication we have selected 11 “quality” stocks from the consumer staples, health care and telecommunication sectors, which look fundamentally attractive over a 6–12+ month investment horizon, but also look interesting on a shorter-term horizon (1–6 months): Baxter, General Mills, Gilead Sciences, KPN, Novartis, Pfizer, Roche, SABMiller, Tesco, Vodafone and Wal-Mart.”
Source: Credit Suisse
Cullen Roche
Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.
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6 Comments
@KPN and Vodafone: Especially KPN has a very attractive dividend yield.
@Pfizer, Novartis and Roche: Well pharmacy stocks are IMHO quite dangerous. Patents, which transform these companies into money printing machines, are aging out. Patents for new medicaments are increasingly expensive. So at the end small companies in India or so can produce the replica-medicaments cheaper. Therefore I think Pharmacy can be a dangereous value trap. Moreover many pharmacy stocks have a negative trend in the 10 year chart (however not Novartis and Roche).
Any objections
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Watch out for foreign tax withholding….on dividends
I’m curious, if stocks under perform going into the contraction phase, why own them. The article seems to say to buy the ones that are less bad. what am I missing. Do you have to be in stocks all the time?
If you hold cash for 6 months or more, then you earn nothing. If you hold bonds, there is bond market risk, e.g. bonds have lost money since about mid-September. For portfolio balance during times of slow growth, it is wise to own at least 15% in defensive equities, the question is, which ones?
Personally, I’ve given up on the whole investment thing. I’m strictly a trader at this point. Today I bought sds @ 21.74 and sold about 35 min. later for 21.95. That’s about as close to investing as I want to be in this market.
What about precious metals?