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Another indicator we follow that measures investor sentiment is the Sell Side Indicator, a BAML measure of Wall Street’s bullishness on stocks. It is shown in the chart below and was unchanged in December at 53.3, remaining near its highest level since April 2012, when it first flashed a “Buy” signal. This indicator has risen in 12 of the last 17 months, since hitting an all-time low of 43.9 in July 2012. Despite the improvement, the indicator still remains in “Buy” territory, as Wall Street’s bearishness remains as extreme as it was at the market lows of March 2009. This measure is somewhat more ‘institutional’ than the AAII or Investors Intelligence surveys that we often refer to, which cover more of the general public’s opinion of stocks. Given the contrarian nature of this indicator, we remain encouraged by Wall Street’s ongoing lack of optimism and the fact that strategists are still recommending that investors significantly underweight equities, at 53% vs. a traditional long-term average benchmark weighting of 60-65%. Even though the S&P 500 has risen by over 30% since sentiment bottomed, history suggests that strong equity returns can last for years after the indicator troughs.
Looking at where we see the better return potential for stocks in 2014, we continue to favour the economically sensitive groups such as technology and industrials. We also expect that the energy and basic materials sectors should finally come out of their 3-year bear markets in 2014 as investors become more comfortable in the view that global growth is solid. Our areas of avoidance would include the interest sensitive sectors of the market (i.e. utilities, Reits), telecoms (due to increasing competition and slower growth) and the consumer sector (where profit margins are under pressure). While gold stocks should recover somewhat from their horrible 2013 showing, the continued short-term strength in the U.S. dollar will continue to be a headwind for the group. These pressures should dissipate once some of the current worries over the emerging markets subside.
In Canada, as an export-based economy, we have always benefitted from a fall in the value of our currency. While sharp falls (like the past few months) are a worry for investor confidence in our economy, the bottom line is that anything earned outside of the country will go up in value. Combine that with the fact that most Canadian companies have more of their costs than their revenues denominated in Canadian dollars, a fall in the dollar does lead to an earnings gain for the majority of stocks, particularly those in export-oriented industries like resources, industrials and technology.
The technology sector is of particular interest to us but it is becoming more apparent that you have to be in the right areas of technology. It’s a well-known adage that ‘the future of computing is in mobile.’ From smart phones to cloud services to tablets, the highest growth is coming from mobile devices. The difficulty had been how to ‘monetize this experience’ or, ‘how do you make money from mobile advertising?’ We don’t think this will prove as difficult as some fear. Mobile advertising offers benefits that you can’t really find with other types of advertising. The idea that you can hit a button and get a direct link to more information on that product or even order and pay for it directly from that device on a secure basis is going to make the productivity of that advertising much higher and therefore allow advertising sites to charge more for those ads. We’re seeing the positive results of this in companies like Facebook, which has moved from a zero position in mobile advertising to over 50% of its revenue coming from that source in less than 18months!