A parting of ways for the US and Europe?

An uptick in Eurozone economic data as well as relative political stability are among the factors most likely to drive a wedge between the performance of the US and European economic blocs in coming months. Recent PMI readings in Europe were far better than expected, with some modest semblance of inflation coming back into the system. The ECB acknowledged as much when at the end of June its President Mario Draghi said the European economy is on the cusp of transitioning from deflation toward reflation.

Meanwhile, other lead indicators in Europe, including GDP growth and earnings revisions, continue to improve driven by cyclical sectors. Despite the recent pullback in oil and commodity prices, cyclical sectors like consumer discretionary and materials have seen strong year-over-year earnings trends as underlying commodity prices remain higher than 12-18 months ago.

Mark Bogar – The Boston Company, a BNY Mellon compa

An uptick in Eurozone economic data as well as relative political stability are among the factors most likely to drive a wedge between the performance of the US and European economic blocs in coming months. Recent PMI readings in Europe were far better than expected, with some modest semblance of inflation coming back into the system. The ECB acknowledged as … read more

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US banks ‘ace’ Fed stress tests

In our view, this year’s CCAR[1] process – which all 34 systemically important US banks passed – points the way to a brighter future for the financial services sector.

The results support our belief that the market has been under-appreciating the magnitude of capital return both this year and importantly next year when the new administration chooses their pro-business appointees at the Federal Reserve.

As long-term relative price-to-book ratios in the sector suggest, a whole group of undervalued companies in the sector have good prospects even if only part of the reform package of President Donald Trump gets through.

John Bailer – The Boston Company, a BNY Mellon company

[1] The Comprehensive Capital Analysis and Review (CCAR) is an annual exercise by the Federal Reserve to assess whether the largest bank holding companies operating in the United States have sufficient capital to continue operations throughout times of economic and financial stress

In our view, this year’s CCAR[1] process – which all 34 systemically important US banks passed – points the way to a brighter future for the financial services sector. The results support our belief that the market has been under-appreciating the magnitude of capital return both this year and importantly next year when the new administration chooses their pro-business appointees … read more

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AI and a brave new world of investing

The development of AI—computer systems that can think intelligently and learn as humans do—continues to generate global excitement and controversy, while dividing public opinion. Some fear the development of intelligent machines poses a greater threat to humanity than climate change and could even presage the end of the world. Others remain optimistic AI can bring huge benefits to humankind, including the scope to boost productivity, revolutionise the workplace and unleash a new wave of global economic growth.

We have identified an AI investment universe of about US$13.5 trillion, including 750 stocks, mainly comprised of US companies. We point to the potential for increased AI application in areas, such as retail, transportation, healthcare, manufacturing and agriculture. The development and adoption of so-called natural language processing and its inclusion in everyday items such as smartphones will likely drive future market growth.

We are going to places we haven’t gone before, and in doing so, there are some unanswered questions that may come into play on ethical dimensions and how much free will AI embodies in machines and what this is used for. These are topics that will come up more and more as AI becomes a part of our daily lives. The hope is we can exploit the potential benefits of AI and harness them for humankind in a way that fosters not only greater prosperity but also helps us to enjoy a better quality of life

Robert J. Kluchko – The Boston company, a BNY Mellon company

The development of AI—computer systems that can think intelligently and learn as humans do—continues to generate global excitement and controversy, while dividing public opinion. Some fear the development of intelligent machines poses a greater threat to humanity than climate change and could even presage the end of the world. Others remain optimistic AI can bring huge benefits to humankind, including … read more

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The natural resources inflection point

Since March 2016 three events have built a floor under commodity pricing. OPEC’s agreement to cut production was one: On 30 November, the cartel reached a firm decision to reduce output by 1.2 million barrels per day. A second key event was the election of President Trump. We expect leadership changes at the Environmental Protection Agency (EPA) and Federal Energy Regulatory Commission (FERC) to support energy and power market development.

Just as significant was the publication in March 2016 of China’s National Development and Reform Commission’s (NDRC) thirteenth five-year plan.

The plan initially targeted coal; illegal mines were forced to close, and the NDRC restricted the number of days that legal coal mines could operate from 330 days per year to 276 days. With Chinese capacity effectively cut from 5.0 billion tons to 3.2 million tons, a price response began globally given the country’s 50% share of global annual consumption. Prices have climbed 85% higher for thermal coal and 290% higher for metallurgical coal through December 2016.

Taken together this triumvirate of developments has helped catalyse an inflection in commodity prices that in our view will likely continue for years to come.

Robin Webhé – The Boston Company, a BNY Mellon company

Since March 2016 three events have built a floor under commodity pricing. OPEC’s agreement to cut production was one: On 30 November, the cartel reached a firm decision to reduce output by 1.2 million barrels per day. A second key event was the election of President Trump. We expect leadership changes at the Environmental Protection Agency (EPA) and Federal Energy … read more

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Why the time may be right for US financials

Brexit markedly lowered global growth and interest rate expectations. As a result, company managements for US Financials focused on cost-cutting and strengthening their balance sheets. We believe US Financials are the cheapest sector and growing the fastest. During third-quarter earnings season, 76% of S&P 500 companies beat earnings estimates. While the average beat was 5.6%, Financials beat estimates by 8%. Additionally, the third quarter was the first in over a year to show year-over-year EPS growth for the S&P 500, largely due the impressive 13% growth in Financials.

President-elect Trump could add additional fuel to the fire. If he deregulates the Financials sector, it could remove a massive growth overhang. Expansionary policies, like increased fiscal spending, could also encourage rate increases. Financials are largely domestic and would benefit most from corporate tax reform, with estimates that a 20% federal corporate tax rate would drive earnings higher by approximately 18% on average. After undue punishment since the financial crisis, headwinds are turning to tailwinds, and we believe US Financials are fundamentally stronger, undervalued and poised for a comeback.

For more insight into what the next 12 months might hold for investors, please visit the BNY Mellon Markets 2017 special report.

John Bailer – The Boston company, a BNY Mellon company

Brexit markedly lowered global growth and interest rate expectations. As a result, company managements for US Financials focused on cost-cutting and strengthening their balance sheets. We believe US Financials are the cheapest sector and growing the fastest. During third-quarter earnings season, 76% of S&P 500 companies beat earnings estimates. While the average beat was 5.6%, Financials beat estimates by 8%. … read more

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Is the outlook for US financials brighter?

The vote for Brexit markedly lowered global growth and interest-rate expectations. As a result, company managements for US financials focused on cost-cutting and strengthening their balance sheets. We believe US financials are the cheapest sector and growing the fastest. During the third-quarter earnings season, some 76% of S&P 500 companies beat earnings estimates by around 5.6%, Financials beat estimates by 8%. Additionally, the third quarter was the first in over a year to show year-over-year EPS growth for the S&P 500, largely due the impressive 13% growth in financials.

President-elect Donald Trump could add additional fuel to the fire. If he deregulates the financials sector, it could remove a massive growth overhang. Expansionary policies, like increased fiscal spending, could also encourage rate increases. Financials are largely domestic and could benefit most from corporate tax reform, with estimates that a 20% federal corporate tax rate would drive earnings higher by approximately 18% on average. After undue punishment since the financial crisis, headwinds are turning to tailwinds, and we believe US financials are fundamentally stronger, undervalued and poised for a comeback.

John Bailer – The Boston Company, a BNY Mellon company

The vote for Brexit markedly lowered global growth and interest-rate expectations. As a result, company managements for US financials focused on cost-cutting and strengthening their balance sheets. We believe US financials are the cheapest sector and growing the fastest. During the third-quarter earnings season, some 76% of S&P 500 companies beat earnings estimates by around 5.6%, Financials beat estimates by … read more

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Is US shale oil back in black?

US shale oil is attracting billions of investment dollars despite recently emerging from the largest boom-bust in the commodity’s history. For traditional oil projects, the economics remain challenging, and risks loom large. However, US shale producers can quickly add resources with a fraction of the risk, but one US unconventional basin stands above the rest.

Why is Permian (an oil and natural gas geologic basin in southwestern US ) shale outperforming oil and outproducing other shale basins? Permian shale producers benefit from the region’s unique geology and well-established infrastructure. The Permian Basin has several stacked layers of oil due to multiple periods of thriving carbon-based life forms and rising and falling sea levels, geological prerequisites for oil creation. Additionally, these pay zones have risen to the surface and become outcroppings, dramatically increasing our knowledge of their production potential.

For many years, the Permian Basin functioned as a conventional oil field. Now, shale provides additional, meaningful life for this basin. Since shale uses similar services as conventional drilling, the necessary infrastructure is already in place for drilling and extracting, allowing companies to quickly and efficiently increase production.

The combination of geography and infrastructure makes the Permian Basin a unique shale play and strategically important to the portfolios of energy producers. Permian oil rigs are on the rise, while rig counts in Eagle Ford and Bakken Basins are plateauing. We expect other plays to recover soon, but investment dollars will pile up higher in West Texas. Despite a modest premium to peers, we believe the Permian Basin represents enormous value with multiple pay zones driving many years of growth and infrastructure in place to develop it.

Robin Wehbé – The Boston Company, a BNY Mellon Company

US shale oil is attracting billions of investment dollars despite recently emerging from the largest boom-bust in the commodity’s history. For traditional oil projects, the economics remain challenging, and risks loom large. However, US shale producers can quickly add resources with a fraction of the risk, but one US unconventional basin stands above the rest. Why is Permian (an oil … read more

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REIT all about it: Where old age can reap rewards

With 10-year US government bonds yielding less than 2%, most similar-duration European sovereign debt yielding less than 1% and Japanese government bond yields in negative territory, investors are increasingly dipping into equity markets to quench their thirst for yield. While many turn to traditional dividend-paying, slow-growth industries, healthcare Real Estate Investment Trusts (REITs) may offer a rare combination of higher yield with a strong growth tailwind.

By design, REITs are required to pass through income to maintain their tax-advantaged status. As of June 30, 2016, healthcare REITs offered a yield of 5.0% versus a 10-year Treasury yield of 1.5%.

Healthcare REITs also benefit from global demographics.  A significant portion of developed market populations will be over the age of 75 by 2030. In the US, the senior population is expected to grow seven times faster than any other adult demographic. By 2050, a full 40% of the Japanese population should be over 65 years old. Because of this massive shift, we expect government and household healthcare expenditures and demand for healthcare services to increase and we believe healthcare REITs may be one of the more attractive ways of benefiting from this long-term global trend.

Jim Lydotes – The Boston Company, a BNY Mellon company

With 10-year US government bonds yielding less than 2%, most similar-duration European sovereign debt yielding less than 1% and Japanese government bond yields in negative territory, investors are increasingly dipping into equity markets to quench their thirst for yield. While many turn to traditional dividend-paying, slow-growth industries, healthcare Real Estate Investment Trusts (REITs) may offer a rare combination of higher … read more

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How millennials are changing food industry choices

Changing US consumption patterns are forcing big change in the food industry. Millennials don’t tend to eat three square meals a day like their parents. Millennials graze, often eating just one meal a day, supplemented with three to four nutritious snacks. This new way of eating favours small local food companies whose brands emphasise quality ingredients and sell through non-traditional channels with higher ‘snack occasion’ penetration.

Large companies are slowly responding. Some snacking leaders are launching new products, such as plant-based chips and nut snacks and repositioning ad campaigns to stress ingredient quality. Other companies have resorted to small bolt-on acquisitions to meet these consumer demands. However, most large-scale food companies acknowledge their inherent disadvantages on this new playing field and are focusing more on margin management to grow earnings. Some also view large-scale consolidation as a way to facilitate this margin strategy. Time will tell if these changes are durable and if larger snack manufacturers can adapt.

David Sealy, The Boston Company Asset Management, a BNY Mellon Company

Changing US consumption patterns are forcing big change in the food industry. Millennials don’t tend to eat three square meals a day like their parents. Millennials graze, often eating just one meal a day, supplemented with three to four nutritious snacks. This new way of eating favours small local food companies whose brands emphasise quality ingredients and sell through non-traditional … read more

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The march of Millennials: What investors need to know

The Millennial generation is now transitioning from the 15-24 age cohort, which has little discretionary spending power, into the 25-35 age cohort associated with household formations and rising discretionary spending. This confluence of Millennials reaching ‘spending age’ and Baby Boomers ageing out of their spending years is expected to significantly affect consumption over the next decade. We believe this demographic transition will pressure consumer spending dollars by roughly 1% a year until 2019, at which point spending should then accelerate. The composition of spending dollars will likely be affected even more dramatically.

The Millennial consumer will represent the highest percentage of peak earners by 2020, and by 2025 will represent 50% of peak earners in the US. No wonder consumer companies have begun to focus on the Millennial customer in such a big way. Addressing the Millennial customer requires a change in strategic direction for many companies, which, combined with the digitalisation of the economy, creates both opportunities and challenges. This is a major focus for our analysts during our management interviews. How do you compete with online retailing giants? How do you acquire a new customer? How is your marketing budget changing? Does your brand have authenticity? How do you retain Millennial employees? These are the questions companies need to answer, which are critical for investment decisions related to this demographic theme.

The Boston Company US Small Cap Growth Team

The Millennial generation is now transitioning from the 15-24 age cohort, which has little discretionary spending power, into the 25-35 age cohort associated with household formations and rising discretionary spending. This confluence of Millennials reaching ‘spending age’ and Baby Boomers ageing out of their spending years is expected to significantly affect consumption over the next decade. We believe this demographic … read more

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