Significant break out for US market will be driven by QE timing, says Head of US Equities, Terry Ewing

–      Bottom up alpha generation key in uncertain macroeconomic environment
Market consensus is that weakness in the labour market will necessitate the Federal Reserve to resume quantitative easing (QE). According to Terry Ewing, Head of US Equities at Ignis Asset Management, the timing of QE and the resulting ‘liquidity’ push on financial assets will dominate the performance of US equities until the end of the year.
Ewing, whose American Growth Fund has returned 10.4% over the past year*, says that data on manufacturing and the consumer continues to be conflicting but job creation continues to be anaemic with unemployment at 9.6%. These figures, Ewing believes, will be foremost in Ben Bernanke’s mind. With early data suggesting that ‘Back to School’ spending has been very healthy, and with evident resilience in manufacturing, Ewing believes QE could be introduced in November.
In his latest investment strategy note Ewing says that on balance, news flow indicates earnings for the third quarter are more likely to surprise on the upside. However, he believes that downward revisions for 2011 are more likely unless there is significant monetary or fiscal stimulus (or mitigated drag) provided. “September’s FOMC meeting and the unemployment report are key macro data points but I believe that a significant break out for the market will be driven by QE timing”, says Ewing.
Market Outlook
“The newsflow on healthcare, retail and industrials has been positive lately, with technology and financial sectors more mixed”, says Ewing. “Capital allocation has been a major theme with announcements of dividends and increased buybacks from bellwether stocks such as Microsoft, Cisco and JP Morgan. On balance, the news flow indicates earnings for Q3 are more likely to surprise on the upside although I still expect downward revisions for 2011 unless significant monetary or fiscal stimulus is reintroduced. Near-term strength supported by global growth dynamics creates a bridge and the likely catalysts of Midterm elections and potential QE in November. The FOMC meetings and unemployment report are the key macro data points to be watched in the short-term.”
Strategy
“I have rarely seen such conflicting macroeconomic data, and as a result I am concentrating on bottom up stock selection”, says Ewing. “I see alpha generation as more important than beta correlation at this juncture and I am focussing on a number of themes including capital allocation, higher yielding stocks, global growth and contrarian plays.  My main overweights are now in telecoms, consumer discretionary and materials. I am broadly neutral consumer staples, industrials and healthcare and I am underweight energy, financials and technology.”
Themes
“I am focussing on a number of themes over the coming months, including capital allocation – stocks with high yields, share buybacks or both, such as Direct TV, Phillip Morris and Verizon. I also like high growth – those companies that are innovating, taking market share or are at a size where they have the ability to grow rapidly irrespective of GDP growth, for example, Riverbed, Allergan, Apple, Alexon and Network Appliance. Global growth is another key theme with the focus on companies geared into emerging market strength such as Las Vegas sands, Yum brands, Caterpillar, Mead Johnson and Dover.
 
“I have recently invested the cash position in my portfolios and mitigated some of my largest underweights and overweights to moderate my defensive posture. The move was consistent with the market having moved towards the bottom end of the trading range that it has been in for a number of months. I have rarely seen such conflicting macroeconomic data and I am taking a bottom up approach as we see alpha generation as key in this environment.”
*Source: Lipper, bid to bid, net income reinvested from 01/10/09 – 01/10/10