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Finding Opportunities in a Late Market Cycle

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Written by: Ben Hernandez

The S&P 500 is in the midst of the longest bull market in history, which may have fear-riddled investors hesitant to jump into the capital markets due to being late to the party. However, some market experts prognosticate that there’s still time to capitalize on opportunities even in a late market cycle.

Samantha Azzarello, Global Market Strategist at JP Morgan Asset Management, cited strong economic data as a precursor for a bull market that could extend itself for another one to three years, as explained in her latest In The Know segment filmed at the NYSE.

“All the data looks really good–GDP growth is surging in 2018 and 2019 on the back of stimulus–we’re saying north of 3%,” said Azzarello. “Earnings growth for this year is 25%–that’s phenomenal–that’s going to support the U.S. equity market.”

Technology Still in Vogue

As far as locating opportunities in a late market cycle, Azzarello still favors tech. When investors are looking for concentrated exposure to a specific sector in U.S. equities, technology is still in vogue, especially with the market-leading FANG (Facebook, Amazon, Netflix, Google) stocks attracting war chests of investment capital.

However, investors shouldn’t just look to these FANG stocks as the sole representatives of the tech sector. While FANG stocks have reached stratospheric market valuations since the financial crisis in 2008, they’re not indicative of the technology sector as a whole where opportunity in other subareas exist.

“When we think about the US, we still like technology,” said Azzarello. “I bring that up saying that this is just not a five-company, social media story. There’s a lot happening under the surface—all of the growth momentum. I’m even thinking of biotech, right parts of health care, media, video games, there’s so much there.”

Opportunities from Abroad

Advisors shouldn’t simply point their investors to the capital markets thriving in the US, but also overseas. Despite faltering on year-to-date basis in 2018, emerging market valuations could present opportunities for savvy investors on a going-forward basis.

Related: In the Know – Stay up to date on ETF This Quarter

It’s a reminder that returns are not a simple case of “what have you done for me lately,” but an opportunity for an investor to identify “what can you do for me later.” In the case of emerging markets, there are prospects to be had that could prove potentially profitable in the future.

“Opportunities right now are abroad,” said Azzarello. “I know international markets have not done the greatest year to date so there’s some hesitation there, but these markets compared to the US have a lot more runway, their valuations are relatively cheaper, they have more earnings firepower, and they’re just earlier in their cycles.”

While investors can still capitalize on the growth of U.S. equities in their portfolios, emerging markets is able to capture a diversification aspect necessary at the current, cheaper valuations. Should U.S. equities languish, investors with capital allocated into emerging markets are potentially exposed to international opportunities where the markets are beginning to gain strength following weakness.

“With respect to emerging markets, there’s a feast-famine mentality,” said Azzarello. “Investors think that they can buy and sell and time it. Structurally going forward, we just want to have just want to have more emerging markets in that diversified portfolio because the returns over the next 10 years are expected to be higher than the previous 10.” 

Related: Investment Management in the Age of Artificial Intelligence and Machine Learning – We do that!

Foregoing Conventional Wisdom

It’s easy for investors and financial advisors to simply apply tried-and-true market strategies, but Azzarello warns that investors must change with the times. This includes foregoing conventional indexes that are market cap-weighted–a strategy that has worked for years due to central bank easing.

Whether it’s multi-factor investing or other smart beta strategies, investors have a plethora of opportunities to generate profits without simply relying on traditional methods.

“That’s not going to apply going forward,” said Azzarello. “We know across the board, returns are coming down and what that means is you have to be more selective however you do that–sectors, factors, markets you want to be in, alpha generation is going to be unbelievably important in the next 10 years.”

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