A resurgent construction industry, the U.S. energy renaissance, the evolution of technology and a second iteration of health care reform are likely to create opportunities for investors in 2014, according to a recent analysis by the U.S. Small Cap Growth Team for The Boston Company Asset Management (TBC), which is BNY Mellon’s Boston-based equity specialist.
In addition to the four themes related to energy, construction, technology and health care, the TBC team also foresees investment themes related to manufacturing and the rotation of funds into U.S. equity markets.
On the macro side of things, the analysis finds that tapering of the quantitative easing program, combined with a continuing accommodative monetary policy, could reduce pressure on the dollar, as well as help draw money into U.S. markets from emerging markets and to reduce commodity prices. The TBC team also expects that the prospect of rising interest rates could shift money from bonds to stocks.
Looking at specific sectors, the analysis finds the energy renaissance, driven by meaningful improvements in extracting hydrocarbons, as a major positive development. Todd Wakefield, senior portfolio manager of the TBC team, says, “We see the energy sector as a leader in job creation and capital spending. Furthermore, the country’s move toward energy self-sufficiency is resulting in structural changes to our trade deficit and foreign policy.”
The analysis finds that other factors worth considering for 2014 include a potential increase in spending on both commercial and residential construction, in addition to continuing developments in technology.
Regarding housing, the TBC team says the inventory overhang from the previous housing bubble has diminished, although household formation continues to be slowed by poor employment opportunities for the 25- to 34-year-old age group. Household formation is an important driver of housing, says the TBC team. The analysis predicts that improving employment in this age group will drive higher household formation, fueling housing demand.
In technology, the TBC team sees growing opportunities in security, “Big Data,” cloud-based computing systems and social media technology. The analysis foresees that Internet-connected technology will grow as more appliances, vending machines and other nontraditional computing devices are linked to the Internet so they can be better controlled and monitored remotely.
The analysis also foresees opportunities to develop in health care and manufacturing.
“Millions of people are joining the health care system, while reimbursement will be reduced for many providers as a result of new regulations,” says Wakefield. “In the sector, we are focused on innovative companies that have pricing power.”
In manufacturing, the analysis notes that 3D printing has the potential to dramatically change production processes, although it will be difficult to select the firms that will dominate the business.
The Boston Company Asset Management, LLC, provides investment management services for corporate, public, mutual funds and union sponsored and jointly trusteed retirement plans, endowments and foundations. BNY Mellon is a global investments company that provides financial services for institutions, corporations or individual investors.
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