Friday, June 14, 2013

More Market Thought from Bernstein Research

Bernstein chief market strategist Vadim Zlotnikov was in town yesterday to meet with clients.

Earlier this month I posted a note about an excellent  presentation that Vadim gave at a Bernstein conference in New York:

Post: Bernstein on Market Multiples and Corporate Profits

Yesterday's presentation here in Boston continued some of the thoughts from Vadim's earlier presentation. I can't do justice to all of his comments that he made in our hour-long meeting, but here are some highlights:
  • The rush towards dividend-paying stocks has created unsustainably high valuations in sectors such as telecommunications, utilities, and consumer staples stocks. These are much more risky than investors believe;
  • Meanwhile, high ROE companies with good fundamental growth propects but no dividends are trading at historically cheap valuations, particularly relative to dividend-payers. Vadim said that the disconnect in valuation between stocks offering high dividends and those who do not pay a dividend now stands at 50 year wides;
  • Chinese growth is clearly slowing but still trending higher.  He would be looking for stocks that will benefit from the growing wealth of consumers in the emerging markets.  He likes companies that offer health care in the emerging markets, for example;
  • The deleveraging of European banks is only about 25% to 50% completed, meaning banks will continue to reduce credit to European companies. This creates opportunities for companies like CIT and General Electric Credit to fill the need for credit;
  •  Vadim's work has not suggested that the shale oil boom will be creating any meaningful long-term benefits for U.S. corporations. He is concerned that the energy sector has over-invested in shale exploration, which could hurt returns in the years ahead;
  • He thinks that today's historically high profit margins are more sustainable than many believe.  As my note of June 4 discussed, many of the gains in margins has been the result of low interest rates, technology and globalization - trends that are unlikely to be reversed any time soon;
  •  Vadim is skeptical of the ability of any asset class to deliver an effective hedge against inflation.  He sees two problems. First, the type of inflation varies over time. The rise in health care costs, for example, has been more rapid than, say, food prices, which makes it difficult to hedge. And, second, any widely accepted inflation hedge quickly becomes overvalued. Heating oil is one asset that some advisors have used to hedge against inflation, but it is not clear that it has been all that effective.
Finally, while Vadim is not a big fan of gold, he notes that if there is one stock sector that is universally disliked it is the stocks of gold miners.

Names like Newmont Mining and Barrick Gold are already discounting another leg lower in gold prices, in Vadim's opinion.  He estimates that if gold were to trade to around $1,100, many gold miners would have to close, since they would not be able to cover their costs.

On the other hand, if gold suddenly were to spike higher these stocks could benefit.  He was quick to add that he is not necessarily recommending gold mining stocks, but rather to point out that they might make sense for the intrepid investor.