Time for a SIP.
The current market volatility has shaken the staunchest bull to his horns. Conventional wisdom would conclude based upon these known variables, an accommodative Fed + improved corporate earnings and revenues + an economy in expansionary mode + benign inflation + job creation gaining momentum, should = multiple expansion along with higher prices on the major indexes. So, why has conventional wisdom been tossed out the window? Here’s a sour tonic to SIP on, add one half cup Spain to a quarter cup of Italy and Portugal, shaken not stirred. Extremely bitter if not taken with a bailout sidecar. With Greece’s can kicked down the road, investors shifted their focus to their EU brethren with similar characteristics. Over leverage, overly generous social programs and stagnant domestic economies coupled with a need to tap the credit markets to refinance outstanding debt and fund bulging budget deficits. If that doesn’t give you a buzz, try this for the next round.
China’s real estate market has all the markings of our tech bubble of the ‘90’s. Excess liquidity, a seemingly insatiable investor appetite for anything tech/Real estate and valuations stretched to the limits of common sense, but surely not priced outrageously by some computer model. China is attempting to deflate the real estate bubble by a number of aggressive measures, short of raising interest rates. They’ve raised bank reserves and they’ve required higher down payment on purchases to name a few. Why not simply hike interest rates? Raising rates would theoretically attract foreign investor dollars seeking the most attractive returns. This may in turn cause an appreciation of the Yuan vs. the greenback. China wages a daily battle to suppress the true value of the Renminbi, lest their goods may not appear as cheaply to their primary trading partners. If current steps taken prove unsuccessful and the real estate market does take the historical path of bubble then burst, the growth engine of the global economic recovery may sputter. The ripple effect would be felt across the south Pacific and may tamp domestic growth which is becoming more and more reliant on exports.
To recap, we have opposing forces at work currently. The Euro dollar may experience further depreciation in the near future, which would suggest more pressure on equities and commodities is in store for us. While China’s real estate market is looking bubblicious, the domestic economy grew in excess of 11%. Not to be overlooked, India’s domestic economy grew in excess of 8.5%. Back in the US, the domestic economy has returned to expansionary mode which, after originally having gotten off to a lack luster start is beginning to gain momentum creating jobs. Consumers, when employed tend to consume more. Meaning more computers and I-Pads bought. More new cars and appliances purchased. Equally significant these same consumers tend to make timely payments on their mortgages and credit cards balances. This should translate to lower defaults and foreclosure levels along with a more stable financial system more willing and able to make prudent loans to small businesses and qualified borrowers.
Our posturing remains virtually the same, balanced but cautious. The GSA year end target of 1250-1300 for the S&P 500 index remains in tact with a neutral bias. We’ll continue to monitor economic, geopolitical and corporate news for any revisions to our forecast.
While jittery investors run for cover, value investors willing to dig through the carnage may take this current volatility to pick up shares of Pepsi of all companies. Pepsi's global beverage and snack franchise story is no less compelling now at $63 than it was at $67. If anything sporting a 3% yield you can fall back on the old adage, "if you liked it at $67 you're going to love it at $63". Pepsi's global franchise should continue to spur top and bottom line growth as they expand their foot print with existing and new beverages and snacks in new and mature markets.
In a note of full disclosure, I may currently own or look to purchase in the future shares of Pepsi for myself and my clients. Before making any investment decision, please do your own due diligence,contact your financial professional or contact myself.
Disclosure: PEP, SPY