Brian Jacobsen

Making the case for U.S. equities (excerpt)

On the Trading DeskSM2-12-14
By Brian Jacobsen, Ph.D., CFA, CFP®, Chief Portfolio Strategist

Four U.S. domestic equity portfolio managers make the case for equities, while Dr. Brian Jacobsen, CFA, CFP®, chief portfolio strategist at Wells Fargo Funds Management, LLC, lends his economic perspective in this excerpt of On the Trading DeskSM from Friday, February 7, 2014.

Watch the full interview.

Jean-Baptiste Nadal, CFA
Jacobsen: Jean-Baptiste Nadal is a value manager with Metropolitan West Capital Management, LLC.

Nadal: We love volatility. I think, next year, the big “if” is tapering and tightening in the U.S. I think I love that. I think it’s going to create a lot of concern because we’re going to see, maybe for the first time, at least for the past two years, desynchronization of monetary policy around the world. People are going to be very concerned about that. And that is an opportunity for us. Because, if you think about it, it’s like the British said—it’s when the investors are “throwing out the baby with the bathwater” that we can really pick up those great companies at a significant discount. So, we love volatility.

Jacobsen: While the United States Federal Reserve is reducing its pace of asset purchases, other developed markets and central banks, like the Bank of Japan, are plowing straight ahead with stimulus. Then, emerging markets countries, like India, Turkey, Brazil, and South Africa, are all raising rates, while in the developed world, rates are staying low if not going lower. That creates, perhaps, some market turbulence, or this desynchronization and volatility.

Tom Ognar, CFA
Jacobsen: Now, Tom Ognar, a growth manager for Wells Capital Management, Inc.

Ognar: It’s interesting. If top-line growth accelerates next year, I think most investors underestimate the margin potential companies have. I know [margins] are at very high levels. But I think companies are so tight on their spending plans, so productive and investing in productivity, that I think if you see that increase in incremental revenue growth come through, I think it’s really going to drop to the bottom line pretty explosively. So, that would be one interesting opportunity for next year.

Jacobsen: Ever since the first quarter of 2010, companies in the S&P 500 Index have been posting profit margins of around 8% or higher. For the fourth quarter of 2013, it’s possible that we will see profit margins just shy of 10%. And that would be a record. So, I think, if we see economic growth, that could continue to translate into more rapid earnings-per-share growth, especially as businesses continue to buy back their shares.

Bryant VanCronkhite, CFA, CPA
Jacobsen: Next is Bryant VanCronkhite, value manager for Wells Capital Management, Inc., with his unique perspective as a CPA.

VanCronkhite: To be honest, I don’t spend too much time getting excited about anything. [Laughter] I find if I can worry about everything and get that part right, the excitement will come later, and that’s going to come on its own through stock picking. What I will say about active management in the mid-cap space is that over the past three years, there’s been a huge headwind from interest-rate movements. About 30% of the Russell Midcap® Value Index is tied to interest rates. And, as rates fall, that part of the index does well. And, when that changes, if you have a view on that, the Russell Midcap Value Index will be a little more challenging and active managers should do a great job, be better positioned to beat the index going forward. I think the era for active management in the mid-cap space is just beginning.

Jacobsen: Historically, mid-cap stocks have suffered from—or perhaps benefited from—the middle-child syndrome. Often, Wall Street analysts focus attention on the large-cap space. Then, often, fast money plows into small-cap shares. That leaves the mid-cap space, oftentimes, overlooked and perhaps host to better values.

Tom Pence, CFA
Jacobsen: Finally, Tom Pence, a growth manager for Wells Capital Management, Inc.

Tom: Well, I’m happy! [Laughter] I think there’s a lengthy discussion about this sort of glut that we’re going to have of crude coming in the second half of next year. I think there’s still the potential to underestimate that—the Gulf of Mexico just being awash with all of this oil that will flow out of the Permian Basin. I’m excited to see that happen. I’m excited to see what that means for refined product costs in the United States. I used to work at a gas station when I was a kid, when it was 50 cents a gallon of gas, and I saw overnight [snaps finger], in 1975, it went to about 75 cents—and then it was a dollar after that. So, I’d be very curious to see what happens if the energy quotient consumers have to pay in this country is compressed. It would be very interesting to see whether OPEC can respond to that.

Jacobsen: The exciting thing about the hydrocarbon build out in the United States is the vast effect it could have on U.S. growth going forward. Not only can it support [corporate] profit margins, but if we see lower energy prices, it can also benefit U.S. consumers as they see their energy bills decline. So, I think there is good reason for excitement in 2014.

And now, I’d like to leave you with my parting thought. While the beginning of 2014 has seen a pickup in market volatility, there are things to be optimistic about. In the risks are the opportunities.

That is all the time we have for this week. Until next time, I’m Brian Jacobsen; stay informed.

The views expressed are as of 2-12-14 and are those of Chief Portfolio Strategist Brian Jacobsen, Jean-Baptiste Nadal, Tom Ognar, Bryant VanCronkhite, Tom Pence, and Wells Fargo Funds Management, LLC. The information and statistics in this report have been obtained from sources we believe to be reliable but are not guaranteed by us to be accurate or complete. Any and all earnings, projections, and estimates assume certain conditions and industry developments, which are subject to change. The opinions stated are those of the author and are not intended to be used as investment advice. The views and any forward-looking statements are subject to change at any time in response to changing circumstances in the market and are not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally, or any mutual fund. Wells Fargo Funds Management, LLC, disclaims any obligation to publicly update or revise any views expressed or forward-looking statements.


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