The S&P 500 just experienced its worst quarterly upset in four years, leaving the index down about 7 percent year to date through September on concerns about slowing growth in China and the fragility of the U.S. recovery, among other factors. Not all industries are equally affected by the turbulence, however. Members of the 2015 All-America Research Team, Institutional Investor’s exclusive annual ranking of the nation’s leading sell-side equity analysts, hold mixed views on what the future holds. Listed below by sector are the 12-month outlooks of some of this year’s top-ranked researchers.
Aerospace & Defense Electronics
“For the year ahead the outlook for the two sides of my sector are different,” says Ronald Epstein of Bank of America Merrill Lynch. “Given the current market backdrop, we are more bullish on defense than commercial aerospace. A weakening outlook for global growth has investors worried about the growth and sustainability of the commercial aerospace cycle. Ultimately, this may or may not prove to be the case; nevertheless, it will likely be a headwind to multiples and valuation for commercial aerospace stocks. Defense is a different story. U.S. defense spending is bottoming and looks like it is set to grow. Defense budgets around the world also appear to be on the rise, due to an increase in regional instability. U.S. defense contractors have limited exposure to oil prices or foreign exchange fluctuations, and the balance sheets and margins of the defense industry are in great shape. Thus, in a risk-averse market seeking stability and predictability, defense seems like a good place to be for now.”
Alternative Energy
“I continue to believe it is an exciting time for the alternative energy sector as solar energy goes mainstream, given cost-competitiveness across multiple segments — utility and rooftop — and in many geographies,” affirms Patrick Jobin of Credit Suisse. “We currently forecast 20 percent global solar demand growth in 2015. It is difficult to ignore the fact that many solar systems are being deployed today based on economic cost-competitiveness alone and are gaining share against traditional sources of power generation. Solar power contracts are now struck between $50 and $75 per megawatt hour — that is in line with wholesale power pricing in most markets.”
Brokers, Asset Managers & Exchanges
“Our outlook for the next 12 months is based on our belief that short-term interest rates will have moved higher but that volatility will remain somewhat elevated as well,” says Kenneth Worthington of J.P. Morgan. “We expect in the near term for equity markets to remain challenging, but we also see the potential for poor to sluggish equity markets over the next three to six months to move higher within the next year. The secular headwind of active losing out to passive for traditional asset managers likely will persist; and while lower markets have disproportionally hurt traditional asset managers, we remain unenthusiastic about that subsector of financials. We do like exchanges and market structure names, in part as a place to hide in the near term, but we also see higher volatility enabling volumes and earnings to grow in 2016.”
Engineering & Construction
“We see more positive catalysts for the group in the latter half of 2016 as oil prices and the new-award outlook improves,” reports Credit Suisse’s Jamie Cook. “We prefer names with a self-help story and that are less reliant on the macro to grow earnings. For longer-term investors we think it’s a good time to pick up some of the higher-quality names with differentiated business models that are out of favor. We also believe companies that are focused on helping customers more effectively manage project costs and that have full [engineering, procurement and construction] capabilities will gain considerable share.”
Master Limited Partnerships
“We’ve had a cautious near-term outlook for the master limited partnership sector given continued uncertainty regarding the trajectory of drilling activity, oil and gas production volumes, and commodities prices,” says Michael Blum of Wells Fargo Securities. “The industry hasn’t seen meaningful decreases in production volumes yet, but we expect declines later this year and into next. Growth capital investments in new energy infrastructure are beginning to slow, and investors are concerned about the sustainability — or runway — for new energy infrastructure investment opportunities, which could translate into slower distribution growth rates for the MLPs. That being said, we view most midstream MLP distributions as secure even in this environment.”
Pharmaceuticals/Specialty
“The speciality pharma sector trades predominantly on deals,” explains Evercore ISI’s Umer Raffat. “Will there be more deals over the next year? Absolutely. But I also think that amid all the deal news flow, the underlying businesses go underappreciated — and perhaps that’s the opportunity.”
Semiconductors
“The group overall faces the longer-term spectre of increasing competition in historically high-growth areas like smartphones, increased difficulty in manufacturing and design — the oft-speculated ‘end of Moore’s Law’ — and an overall maturation,” contends Sanford C. Bernstein & Co.’s Stacy Rasgon. “In such an environment I prefer to look for stories with a structural element or catalyst. Examples include NXP Semiconductors of the Netherlands — “good growth potential and structural upside from the pending merger” with U.S.-based Freescale Semiconductor — and Texas Instruments, which he dubs “a very strong cash return story.”
Shipping
“We’re bullish on product and crude tankers and such areas of secular growth as floating liquefaction and floating regas,” says J. Michael Webber Jr. of Wells Fargo Securities. “We’re still cautious around marine [master limited partnerships], the bulk of our container coverage and dry bulk. Given all the current volatility, we’re focused on secure cash flow growth, liquidity and balance sheet strength.” Euronav of Belgium and Bermuda-based Golar LNG are among the companies he currently favors.
