Today's comment is by Eric Roseman, Investment Director for The Sovereign Society and editor of The Sovereign Society's Investment Trading Service, Commodity Trend Alert.
Dear A-Letter Reader:
In the middle of the worst decline for global markets since July 2002, large-cap stocks are now poised to show strength compared to smaller and mid-cap stocks. Though certainly no panacea amid a severe correction, large-cap stocks do provide a cushion for investors. Most multinationals pay regular dividends - now averaging 3%, trade at an average 12 times trailing earnings and harbor predictable revenue growth in all markets.
Since 2001, U.S. large-cap stock funds have gained just 0.5% per annum versus 10% per year for small-cap equity funds. Why the performance differential? Smaller stocks tend to post significant earnings growth at the start of an economic expansion while large-caps are superior performers towards the end of an economic cycle. The United States suffered a mild economic recession in 2001 and has since posted strong economic growth led by smaller companies and mid-cap stocks. But that trend ended in May as global investors reduced risk and shuffled their portfolios away from small stocks and emerging markets.
As investors grow defensive, money-managers swap portfolio risk and head into stodgy multinationals to protect their portfolios and generate income. This was the case in 2000 and in 1994 - both tough years for global investors. In fact, in 2000, large-cap value stocks withstood the first year of the bear market (2000 to 2002) and logged profits while the rest of the market cratered.
Another plus for global large-cap investors now is the growing trend in corporate insider buying for several multinationals. Also, many large-caps in the United States are aggressively buying back shares with record amounts of free cash-flow - a bullish sign for stockholders. Value investors tend to follow cash-flow, and today, global multinationals are sitting on record amounts of cash. Companies tend to reinvest that cash into their own businesses or increasingly, plow that cash-hoard into buybacks and rising dividend distributions.
In the July Sovereign Individual , I'll highlight the world's best-performing euro-denominated global blue-chip exchange-traded-fund (ETF). This undervalued index now trades under 12 times earnings, yields over 3% and weathered the recent storm in world markets far better than most averages.
Is this a bear market or a much-needed correction? Global markets have breached important support levels in June while mutual fund redemptions are now off the charts as investors scramble for the exits. But one thing is for certain: The global economy is slowing as central banks tighten liquidity and raise interest rates. The market is growing defensive. This is the time to buy cheap blue-chip stocks for long-term growth and income as money-managers shift from aggressive growth equities to conservative large-caps.
ERIC ROSEMAN, Investment Director
on behalf of The Sovereign Society