Strategists at Citi have pointed to four U. S. stock strategies that break with a crowded consensus.
\u00ab\u00a0There are four points that still seem very much consensus-like yet do not have the kind of solid backup data,\u00a0\u00bb Citi said in a note dated late Wednesday U. S. time. \u00ab\u00a0There’s opportunity in going against the grain.
1. Equity market valuations aren’t actually terribly expensive, Citi said.
Analysts have been citing the Shiller cyclically-adjusted price-to-earnings ratio (CAPE) as indicating stocks are expensive, Citi noted, but it added that while the level was fairly high compared with its history, that may not mean much.
\u00ab\u00a0It is cited regularly by bears, with barely any evidence that it is worth tracking,\u00a0\u00bb Citi said. \u00ab\u00a0The CAPE has extremely low predictive correlation when looking out a year. \u00a0\u00bb
In fact, the real issue was a plunge in energy industry capital expenditure, it said.
\u00ab\u00a0While the popular narrative of weak business investment has been ongoing for two years at a minimum, the hard numbers indicate that such thinking is simply wrong,\u00a0\u00bb it said. \u00ab\u00a0The oil patch’s pricing issues hammered this one area and it is recovering now. IT budgets, for example, never faltered even as too many investors focused on buybacks which were fairly concentrated. \u00a0\u00bb
Citi noted that more corporate investment could be on the cards as well, noting a policy proposal to allow first-year 100 percent depreciation write-offs, which could spur spending in 2017 and 2018.
3. Citi isn’t buying into the consensus view that U. S. small caps were likely to outperform large caps.
\u00ab\u00a0The likelihood of even higher bond yields is growing as growth and nascent inflation combine with fiscal stimulus that probably won’t be as revenue neutral as might be suggested. Add in a border tax possibility and everyone flocks to small caps,\u00a0\u00bb Citi said.
But the bank still expected large caps will outperform.
\u00ab\u00a0Higher yields usually mean large caps do better,\u00a0\u00bb it said. \u00ab\u00a0A powerful dollar surge would drive small caps but the greenback already has moved sharply in the past few months and future gains might be much harder to come by. \u00a0\u00bb
In the wake of Donald Trump’s surprise U. S. election win, the dollar index, which measures the greenback against a basket of currencies, surged to a 14-year high. Larger companies tend to have more overseas earnings, which would be hurt when they are translated back into the greenback.
Trump has since floated the idea of a \u00ab\u00a0border tax\u00a0\u00bb to discourage imports into the U. S. Since larger companies tend to be more likely to import components, equipment or products, tariffs would hurt them more than smaller companies.
\u00ab\u00a0Liking Media stocks generates ‘raspberries’ as the Street remains deeply concerned about cord-cutting and pricing issues,\u00a0\u00bb it said. \u00ab\u00a0However, valuation and earnings revision momentum support the industry group’s relative outperformance potential as might M&A activity. \u00a0\u00bb
Citi also noted that new technology, such as virtual and augmented reality, could also drive the sector.
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