Investing in the current economic climate
Jim Gentrup, CFA
The one thing that is a constant in today’s economy is uncertainty. Overall GDP growth in the U.S. is a paltry two percent, and our aging population may create a drag for years to come. This underscores the need to search for those parts of the economy that have a tail wind versus areas that are muddling along with an uncertain future over the next year or two. After all, why invest in areas where the outlook is murky when you have the choice! Part of the issue with many investors is that they tend to focus and worry about the weak parts of the economy and it creates doubt in their mind. This doubt leads to indecision and lost opportunity. Here at Netzel Financial, we focus our efforts on finding those pockets of the economy that have momentum with a high probability of sustainability. It could be a secular growth story, which is the ultimate find, or a cyclical industry that is just beginning to recover. In addition, we like to invest during the early to middle innings (baseball fans will know what that implies). Here are just a few examples: It’s no secret that the energy industry is in the doldrums. Oil prices have been in decline since mid-2014 due to the stronger dollar and weaker demand abroad. Meanwhile, supply in the U.S. has increased substantially due to new extraction techniques. In addition, OPEC and Russia are unlikely to cut production. Although prices may have bottomed, a significant rebound is unlikely until production declines. In other words, we are in the middle innings! While the outlook is uncertain in the energy patch, why not focus on industries that are likely to benefit from low oil and natural gas prices. Chemical companies that are set to benefit include those that manufacture products such as industrial coatings, adhesives, alcohols, fibers, and solvents. In the technology sector, increasing demand for IP-based video, especially on mobile devices, has led to strong growth in high-end servers that can process and store the plethora of data produced and eventually watched by consumers. We also like business services companies that help make their customers more competitive. For example, when a sales rep of a large technology-service provider bids on a project, he wants to know as much as possible about what his competitor is offering and at what price.
I have taken this short summary piece nearly full circle, discussing huge mega-size industries like energy and finishing by commenting on a niche industry that serves a select group of technology companies. The point is that investors need to focus less on what the macro trends are and more on finding which industries will grow despite macro-economic conditions (or as a result of certain conditions). These discoveries take time, research, and good judgment. This is where we thrive, whereas most people don’t have the time, energy or inclination. We focus on acting on our findings to enhance our clients’ goals.
Want to learn more? Contact Jim Gentrup, CFA, Portfolio Manager, Netzel Financial; phone 480-219-0657.