It’s time to switch into U.S. multinationals.
After a healthy run by domestic S&P 500 companies on the back of stronger U.S. growth along with a rising U.S. dollar, investors could be wise to take some profits on this crowded trade. That’s because multinationals have grown to be more attractive on a relative value basis, the greenback’s valuation is rich, and growth is improving abroad.
The U.S. dollar is within correction mode as a result of a more dovish U.S. Fed, weakness in U.S. economic data, a current level for the U.S. dollar that implies a Fed Funds rate above three percent, and a potentially tighter oil market.
Monetary policy can also be more supportive outside the U.S., which is serving to reverse investor sentiment from deflationary to reflationary, especially in the eurozone.
J.P. Morgan’s macro indicator suggests the U.S. is in the slowdown phase from the cycle, which historically favours high quality companies with stronger balance sheets and healthier margins – attributes frequently found in multinationals.
“Multinationals look attractive on valuation given that historically they\’ve traded at a significant premium to domestic companies,” said Dubravko Lakos-Bujas, the firm’s equity strategist. “This will make for an attractive quality in a reasonable price trade.”
Multinationals should therefore visit a re-rating higher as earnings visibility is improving, margins are strengthening and they offer an attractive average shareholder yield of 5.1 per cent, compared with 4.2 percent for domestic companies.
Lakos-Bujas?also noted that multinationals?actually have a higher-than-average short interest as a percentage of their float at 3.3 percent, versus the 10-year average of 2.8 per cent.
Meanwhile, domestic companies have a below-average short interest of three.6 percent, versus an average of 5.1 per cent.
“The Street sentiment has turned sharply negative and it is approaching levels seen throughout the recession, setting a low bar for positive surprise,” the strategist said.
And that could make this contrarian exchange multinationals all the more lucrative.