Merrill Lynch: 10 Reasons to Buy Industrials
- Joshua M Brown
- September 30th, 2013
Merrill Lynch’s chief of quantitative strategy is out with a call on the industrial sector this morning I’m trying to find the time to get all the way through. To kick off the report, the team lists ten bullet points that sum up the bull case:
1) The charts: bullish technical trends
Analyst Steve Suttmeier recently noted that Industrials has broken out relative to
the S&P 500 to its highest level since early 2012, a bullish trend for the sector.
2) The world: improving global growth backdrop
Global PMIs have been ticking up, and Europe—the region to which the sector’s
returns are most correlated—appears to be in the early stages of recovery.
3) The macro: capex / GDP / oil price beneficiary
Current oil price levels benefit Industrials via energy capex via investment in
energy infrastructure, production and efficiency. Moreover, overall capex may be
picking up, and our economists forecast business spending to grow 3x faster than
consumer spending by early next year.
4) The micro: upward revisions by analysts & management
The 3-month earnings revision ratio is at its highest level since June 2012. And in
contrast to the divergence between guidance and revisions that we have observed
for the S&P 500 overall, management has been growing more positive since May.
5) The cycle: Less impacted by rising interest rates
The sector’s performance has historically been uncorrelated with real interest rates
and has generally outperformed the S&P 500 in rising rate environments.
6) The themes: Industrials driving US innovation
The Industrials sector is at the forefront of US innovation, driving themes such as
the industrial internet and automation.
7) The rebirth: US manufacturing renaissance has legs
US manufacturing has become increasingly competitive with the rest of the world
thanks to lower energy costs, a narrowing wage gap between the US and
emerging markets, persistently low inflation and a weaker dollar vs. history.
8) The sweet spot: half growth, half yield
Industrials will likely become increasingly attractive to the growing pool of equity
income managers, who have begun to look for less expensive and less ratesensitive ways to meet their income mandates.
9) The big surprise: it’s now the highest quality sector
Industrials has the most stable earnings of all ten sectors (even vs. defensives like
Consumer Staples!) but is still penalized for being too cyclical, as it is trading at a
beta of 1.3. There is a glaring mispricing of risk that argues for a P/E re-rating.
10) The price: still a good value—especially Conglomerates
Industrials look fairly valued vs. to history on relative forward P/E. And the
Conglomerates—our favorite industry—look quite inexpensive on this metric.
Josh here: I concur with most of this, at first glance. Our portfolios have taken advantage of the relative underperformance in the group in the spring, we are now equal to overweight.
10 reasons to like Industrials
Equity and Quant Strategy | United States
30 September 2013
bank of America Merrill Lynch
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The Reformed Broker is a blog about financial markets and the economy. Joshua Brown is a New York City-based investment advisor for high net worth individuals, charitable foundations, retirement plans and corporations... More.