The strong performance of consumer discretionary, consumer staple, and telecom stocks in Canada to date in 2016 has caught many investors unawares.
They were supposedly “crowded trades” C poised for just about any pullback when market forces became predominant and caused a rotation into other locations C simply because valuations looked pretty lofty.
Things haven’t competed by doing this.
Brian Belski, chief investment strategist at BMO Capital Markets, noticed that valuations within the client staples and telecom sectors were already near their cyclical peaks as 2015 came to a close. Yet they’ve continued to push higher into 2016.
Meanwhile, consumer discretionary stocks experienced a higher valuation decline as 2015 ended, nonetheless they have were able to stage a comeback recently.
Beliski noted that tracking valuations in trades that are considered being crowed is not a reliable indicator of returns for your coming year.
Instead, he discovered that outperformance can happen anytime together with valuation range C from cheap to expensive.
“Consequently, valuation levels and also the considered a crowded trade shouldn’t drive sector allocation,” the strategist said in the report.
Not only is sentiment supporting these sectors, nevertheless the fundamentals also appear to be copying this performance
Consumer staples and consumer discretionary reported the most effective positive earnings surprises within the fourth quarter.
Results within the telecom sector arrived slightly below expectations, but companies still post consistent revenue growth and dividend hikes.
So now now when was it here i am at investors to lighten on these sectors?
Belski noted that since expected earnings growth indicates to become very accurate predictor of relative outperformance within the coming Twelve months, particularly when expectations are close to their historical averages, each one of these three sectors will see further gains.
For the customer sectors, both have posted strong earnings growth. Moreover, expectations come in line with historical averages, which leaves room for positive surprises.
Telecom, meanwhile, is seeing positive expectations that are near to the long-term average.
Finally, Belski noted that three sectors are forecast to produce earnings growth that slightly outpaces that relating to the broader S&P/TSX composite index.
Some in the macro factors he cited that support these trends include still-positive domestic household consumption, rising housing prices and record low borrowing rates, the weak Canadian dollar and elevated food inflation, and healthy pricing power in the telecom space.
