From the "Second Derivative" to Growth

George Hosfield, CFA, is Ferguson Wellman’s chief investment officer and chairs the firm's Investment Policy Committee.

Economic Backdrop


In our Capital Markets Update from May 1 titled, “Risk, Reward and the Green Shoots of Spring,” we outlined the case for beginning to increase exposure to equities on a belief that the rate of decline – known as the “second derivative” – in both U.S. and global economic growth was moderating. With industrial production, retail sales and even employment improving, in our view, the debate about recession versus recovery will soon be over. Further, GDP growth will likely be positive 
this quarter.    

Asset Allocation


The market has certainly come a long way in a short period of time, yet a correction is not out of the question.  However, with earnings expectations rising and a significant amount of cash on the sidelines (most investors have “missed” this rebound), a material sell-off may not be imminent. With this in view, we continue to opportunistically increase our allocation to large-cap equities. On the other hand, with a possible Fed policy tightening in 2010, we are taking steps to reduce our fixed income commitment and to shorten the duration of those holdings.

Sector Focus: Industrials


In order to gain greater leverage to the global economic recovery, among our domestic equities, we have recently reduced our allocation to defensive sectors, such as consumer staples and telecommunications and committed the proceeds in cyclical sectors such as basic materials, technology and industrials. To that end, below are some comments from Principal and CEO Jim Rudd who manages the industrials sector for the firm.

We have made a conscious effort to move our portfolios to a more aggressive/cyclical posture. Nowhere is that more evident than our industrials sector. This space is littered with industries that highlight two areas we believe are true “growth” themes for the next several years: emerging economies and infrastructure. The underlying drivers of infrastructure spending in emerging economies are urbanization, income growth, modernization, environmental, energy, and economic productivity. This phenomenon is occurring around the world and is particularly robust in Brazil, Russia, India and China (the BRICs).

In short, we are buying names that are leveraged to global growth. Emerging markets are projected to grow at nearly three times the rate of developed markets in 2010. Therefore we want to own companies that have a substantial portion of their sales outside of the U.S. Another aspect of emerging economies is their increasing consumption of energy and commodities.  In addition, this sector benefits from dollar weakness which in recent months has made our products more affordable overseas.

Global stimulus packages have focused on the infrastructure theme, and while some projects are more shovel ready than others, we believe it is an investible theme over the next several years. These infrastructure projects are massive in scope and are multi-year projects, which gives companies a great deal of visibility into the future. Given our desire to maximize our leverage to global growth within the industrial sector, we have reduced our commitment to more domestically focused industries, such as railroads and defense contractors.

The information provided herein is for educational purposes only and should not be construed as investment advice or as an offer or solicitation. Not all securities are suitable investments for all investors; therefore, Ferguson Wellman Capital Management will not necessarily implement any particular strategies discussed herein for all clients. We recommend that you discuss questions regarding your individual portfolio and investment strategies with your portfolio manager.