As discussed in “Are stock market investors getting too greedy?” sentiment indicators are warning of seriously overbought conditions in stock markets. But any market pullback should be a buying opportunity within a long-term bull market, argue analysts Tony and Rob Boeckh in their latest Boeckh Investment Letter.
I’m inclined to agree if only because the Boeckhs are some of the best at analyzing financial markets and macroeconomic trends. Tony’s views are especially deserving of consideration given his experience from 1968 to 2002 serving as chief executive and editor-in-chief of the highly regarded Montreal-based Bank Credit Analyst (normally only available to institutional investors).
The main reason offered for their bullish perspective is the huge mountain of cash still sitting on the sidelines (as much as $600 billion in corporate money according to an RBC estimate). As investors grow less defensive and move this cash into the market over the next couple of years, stock prices should trend upward.
Pension funds are “severely underinvested in equities at the moment.” Mutual funds have similarly low exposure to stocks—over $400 billion (U.S.) has flowed out of U.S. equity mutual funds in the past five years while $1.2 trillion (U.S.) has flowed into U.S. bond and income funds. And with bonds substantially overvalued, a lot of the money in this asset class is ready to flow into stocks.
The Boeckhs recommend avoiding the overvalued defensive sectors, such as utilities, consumer staples, and food. Instead, seek out cyclical areas such as industrials, financials, steel and automobiles in the U.S. In Canada, the materials group are highly cyclical. The two analysts also like Eurozone, Japanese and Chinese stocks, which are trading at substantial discounts to book value compared to the U.S.