January’s stock market performance reinforced fund manager expectations that economic growth abroad will be stronger than in the U.S.
X “Many investors believe that Europe and Latin America and places like Japan have the potential for even stronger earnings growth than the U.S. in coming quarters,” said Tom Galvin, lead manager of $4.3 billion Columbia Select Large Cap Growth (ELGAX). “That has led to some allocation shifts to non-U. S. stock names.”
U.S.-focused Columbia Select Large Cap Growth is capitalizing on the trend in another way. “Our fund contains many U.S. multinationals, which in aggregate obtain nearly half of their revenues from outside the U.S., so we benefit from the synchronized global recovery that way,” Galvin said.
And January’s stock market showing was itself clear cut and upbeat — a fast start for the new year. The S&P 500 rocketed up 5.73%, pulling U.S. diversified stock mutual funds up 4.37% on average. That was the S&P 500’s 15th straight monthly gain and its best monthly gain since March 2016’s 6.78% jump. For U.S. diversifieds, it was the fifth monthly gain in a row and their best since November 2016’s 5.19% climb.
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World equity mutual funds did even better than U.S. diversified stock funds, rising 5.66%.
“The gains are evidence that economies in the U.S. and around the world are doing well,” said Stephen DuFour, manager of $1.7 billion Fidelity Focused Stock Fund (FTQGX), which topped 86% of its peers tracked by Morningstar Direct last month. “When I talk with people producing tractors, combines, I hear about growth in areas where it hasn’t been seen in years. In the U.S., unemployment is low, wages are rising and corporate earnings were very strong the last couple of weeks. And earnings projections are rising, getting a boost from lower tax rates.”
The solid gains in January came amid month-end market softness. The market was rattled by rising bond yields, the prospect of new pricing pressure on health care providers and rising oil production, Galvin said. Rising bond yields fueled fears of a rotation from dividend paying stocks into fixed income.
Countering with some upward pressure were strong corporate profit reports and job gains, as well as the Federal Reserve’s decision to leave interest rates unchanged.
By Thursday, though, there was enough downward pressure for IBD to read the market’s direction as uptrend under pressure. Three out of four stocks follow the market’s direction, according to IBD research, so stock mutual funds are likely to have more difficulty generating gains.
With a 7.99% gain, large-cap growth funds paced all U.S. diversified stock fund categories in January. Global science/technology funds topped all sector categories by advancing 8.27%.
Latin American funds led world equity fund groups with a 9.9% burst.
U.S. taxable bonds eked out a 0.05% gain amid expectations of three Fed interest rate increases this year.
Going forward, the technology, health care and consumer sectors look like the most fertile grounds for investment opportunities to Galvin, whose fund outperformed 72% of its peer group in the 12 months ended Jan. 31.
The consumer sector is still showing strength after a strong holiday shopping season, he says. In health care, recently announced mergers have fueled anticipation of more consolidation, he says. “Coupled with the benefits of offshore cash coming home due to tax reform, that’s added to investor interest,” he said.
He notes a wave of tech companies are due to report earnings in February. “I look at tech stocks as industrials on steroids,” he said, “with better corporate profits and benefits from lower corporate tax rates. We should see stronger capital spending, which will likely lead to greater spending in IT (information technology). Those factors should sustain strong gains by tech in 2018.”
Amazon.com (AMZN), his largest holding, after the close Thursday reported Q4 earnings that smashed expectations amid strong sales growth.
Looking beyond the near term, Galvin said, “Despite its spending, Amazon has a long runway. It continues to grow its presence in a variety of sectors. This week’s announcement about a health care partnership with Berkshire Hathaway (BRKA) and JPMorgan Chase (JPM) (to form a new health care company) is another reminder that Amazon has a presence not just in pure retail.”
Galvin likes Alibaba Group (BABA) because it benefits from the fast growth of online commerce in China. “It’s the largest e-commerce retailer in China,” he said. “And China continues to show strong economic growth. And the accelerating preference for online spending there should power strong double-digit earnings growth in coming quarters.”
Alibaba on Thursday reported that fiscal Q3 earnings rose 25% on a 66% sales increase, but earnings were below expectations.
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And he likes the prospects for Priceline (PCLN). “It’s been a laggard, but it’s a leader in online travel. Consumer spending will strengthen because of growth in wages, lower taxes and (younger generations looking for novel travel experiences). It should be a midteens earnings grower, although there are some questions about margin pressure in the near term.”
Like Adobe, Intuit is shifting to a subscription model for cloud-based software from sold-in-stores software packages. “They’ve got stronger growth because the (new model) lets them produce their programs for different countries by adding new language versions,” DuFour said.
Microsoft’s Azure, a cloud computing competitor for Amazon Web Services, “let’s Microsoft cope with a changing world.” Growth in online gaming is one aspect of that, he added.
And Walmart (WMT) is a newcomer to his top 10. “Walmart has the size and capability to actually take on Amazon,” he said. Walmart is learning how to compete online with Amazon from its acquisition of Jet.com, a low-cost online sellers of a wide range of goods.
One example of how Walmart can leverage its existing assets is by having store employees deliver goods to customers on their way home from work, DuFour said.
Charles Shriver, lead manager of T. Rowe Price’s $2.4 billion Personal Strategy Balanced (TRPBX) and $344 million Global Allocation (RPGAX) funds, says his funds have shifted to overweight in foreign stocks. Many Japanese and eurozone stocks offer better valuations than many U.S. stocks, he says. Those markets have accommodative monetary policies at a time when the U.S. Federal Reserve is raising rates. And those stocks provide exposure to markets growing faster than in the U.S.
Among Global Allocation’s holdings, Japan’s Sumitomo is a diversified conglomerate that trades goods and services. Shares were up 33% in the 12 months ended Jan. 31. ADRs for car and truck maker Toyota Motor (TM) were up 19% in those 12 months.
ADRs of Bayer (BAYRY), a German-based maker of drugs, chemicals and agricultural treatments, are up 18% in the past 12 months. Earnings per share were flat in Q3 after two quarters of decline.
ADRs of drugmaker Novartis (NVS), whose Swiss headquarters is not in the eurozone, were up 22% in the past 12 months. EPS grew 0%, 5% and 8% the past three quarters.