Much like a competitive surfer, investors can’t wait too long searching for the best “wave” to ride through the markets, says John Stephenson, senior vice-president, portfolio manager, First Asset Management, and while not perfect the U.S. market offers the best investment opportunities in 2014.
“You’re starting to see the U.S. turning around,” said Stephenson, who spoke at the CFA Society Toronto’s Equity Symposium on Tuesday. “No, it’s not the strongest recovery in the world, no, it’s not the best recovery in the world but it’s like being a surfer – probably still your best wave.”
The U.S. is likely to see 3% GDP this year, the best growth it’s seen in a decade, said Stephenson, as areas such as housing, oil and gas the autos improve.
One investment sector that Stephenson expects to do particularly well in 2014 is U.S. financials. Large banks such as Citigroup Inc. (NYSE:C), JPMorgan Chase and Co. (NYSE:JPM) and Bank of America (NYSE:BAC) are particularly positioned to see high returns in 2014, said Stephenson, due to their currently low multiples, the expanding housing market and the winding down of their legal troubles.
For example, at the time of the presentation, Citi was trading at a multiple of 9.3, said Stephenson, well below it’s historical average of 15.5 times. As well, the banks are seeing an increase in their loan business as the housing market picks up, he said, and changes in management and a return to more conservative banking prices means there are fewer bad loans on the books.
Furthermore, while the U.S. government and the public vilified these banks during the financial crisis, said Stephenson, many of their legal woes, particularly in regards to JPMorgan, are behind them.
“As that litigation risk drops off from these financial institutions,” said Stephenson, “they are then in a position where they can go out and start returning money to shareholders.”
As such, Stephenson expects these banks to return 40% of earnings to investors over the next year through a variety of means including dividend increases and share buybacks.
Another area Stephenson favours in the U.S. equity space is the technology and industrials sector. Although, Stephenson warns that it will be harder to find good stock picks in the industrials sector as that part of the market has done very well recently.