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U.S.-China Trade Talks: Buy Financials, Not Tech, Strategist Says

Credit: The Street
Published on July 30, 2019 - Duration: 05:25s

U.S.-China Trade Talks: Buy Financials, Not Tech, Strategist Says

If all goes well on the trade front when the U.S. and China meet this week, the major indices may rise, but the gains may ultimately be most concentrated in financials and cyclicals, rather than in growth tech.

"The opportunity that exists is going to be in the more attractively priced parts of the market, many of which are more cyclical today," Josh Emanuel, chief investment officer at Wilshire Funds Management said.

"So when you look at value as a style, you look at the financial sector versus technology as an example, the dispersion in valuations is very significant between those two parts of the market." Before we get to why all of that may be so, let's go over some important facts first.

Earnings growth is expected to come in at roughly 2.3% for 2019.

Meanwhile, the average forward earnings multiple on the index is around 17, higher than the 10-year average of 14.8, as the index has risen 20% year-to-date, in part because the market believes further tariffs are out of the question.

Emanuel doesn't disagree that's not exactly an attractive combination.

But "I think investors likely could benefit from a more material upside in the more value oriented parts of the market relative to growth oriented parts of the market," Emanuel said.

Right now, banks and financials trade at roughly 11 times earnings, versus big tech, which can range anywhere from the low 20's for players like Facebook and Amazon , and above 40 for other stocks exposed to the cloud and software.

This is a normal difference, but perhaps financial stocks have slightly slimmer valuations than usual.

Citigroup trades at 0.91 times book value.

Bank of America , Goldman Sachs and Wells Fargo all trade at roughly 1 times book value.

Meanwhile, fewer rate cuts would mean there will be less of a floor on tech valuations.

Investors will have to weigh the net effect of falling interest rates and potentially improving economic growth expectations on any trade agreements for bank stocks.

But as Emmanuel noted in a previous interview, better growth expectations with any trade deal would likely prompt investors to price in fewer rate cuts, another positive for the banks.

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