July 2014 Portfolio Outlook

The end of June, as the halfway point, is a good time to stop and reevaluate the assumptions you brought into the year.   You should ask yourself: Are your strategies still working, and if they are not, what is your game plan for the second half of the year?

So with that in mind, let’s take a look at what I was saying in January:

You will see a handful of consistent themes across Sizemore Capital portfolios:

  1. I am overweight Europe and emerging markets.
  2. I am overweight dividend-paying U.S. equities.
  3. I am underweight non-dividend-paying U.S. equities.

While I remain broadly bullish on U.S. equities in general, in my view they no longer offer compelling value… Looking overseas, I see much more attractive pricing and better opportunities for capital gains.  Europe, by and large, has not participated in the past five years’ worth of bull markets, and the continent is only now starting to emerge from its post-crisis, austerity-driven recession.  And most emerging markets—which collectively were a fantastic asset class for most of the 2000s—have traded sideways or down since 2011…

Finally, now that tapering has finally begun, I expect investors to reevaluate income securities.  Dividend paying stocks and, particularly, “bond substitutes” such as REITs were dumped indiscriminately in 2013 as investors, terrified of what tapering might mean, sold first and asked questions later.  But as the reality sets in that inflation remains near generational lows and Fed tapering will be a slow process, I expect all yield-focused investments to enjoy a healthy rally in the first half of 2014.

For the most part, these were the right calls to make.  U.S. stocks have performed a little better than I expected, but gains have been modest.  Bond yields have retreated, and “bond-like” REITs have enjoyed fantastic returns.  Year to date, the two most conservative holdings in Sizemore Capital’s Dividend Growth Portfolio—dividend machines Realty Income (O) and National Retail Properties (NNN)—are up 18% and 22%, respectively, not including the value of dividends paid.

Emerging markets got off to a far rockier start than I expected due in no small part to a currency devaluation in Argentina, unrest in Turkey, and the Russian invasion of Crimea, but the asset class as a whole has performed well since mid-March.  And given that emerging markets remain very attractively priced and very underowned among investors, I see a lot more upside to come.

Finally, Europe continues to perform well, and with the European Central Bank taking the monetary stimulus torch from the Fed, I believe we could see a bona fide melt-up in European stocks in the second half of the year.

I am very pleased with Sizemore Capital’s performance year to date through June 30.  Dividend Growth is our best-performing portfolio with year-to-date total returns of 14.1%.  Global Macro follows with year-to-date total returns of 10.2%.  Tactical ETF has enjoyed year-to-date total returns of 8.4%, and finally the Strategic Growth Alllocation has seen year-to-date total returns of 7.0%. The S&P 500 has enjoyed total returns over the same period of 7.1%.  [Disclaimer: All returns calculations are made by Covestor and include dividends received and manager fees paid. Past performance is no indication of future results. ]

As always, my portfolio moves will depend on market conditions going forward, but based on current valuations and macro conditions I continue to expect outperformance from a portfolio overweighted to dividend-growth stocks and European and emerging market stocks.

Charles Lewis Sizemore, CFA, is the editor of Macro Trend Investor and chief investment officer of the investment firm Sizemore Capital Management. Click here to receive his FREE weekly e-letter covering top market insights, trends, and the best stocks and ETFs to profit from today’s best global value plays. 

This article first appeared on Sizemore Insights as July 2014 Portfolio Outlook

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