2 Top Markets…and 2 to Avoid

05/26/2012 11:00 am EST

Focus: STRATEGIES

Jack Ablin

CIO & Executive Vice President, BMO Private Bank

Jack Ablin of Harris Private Bank uses his five-point method to evaluate the changing climate for stock investors, in the process revealing the types best suited to today’s markets.

We’re here with Jack Ablin, who’s going to tell us where to look for the best opportunities in the markets today.

Great, thanks Gregg. Yeah, I look at five factors in evaluating the market: valuation, the economy, liquidity, psychology, and momentum.

From a valuation basis, the equity markets are generally slightly undervalued. A decent deal, not a table-pounding deal. And I would look at US Large-Cap, US Large-Cap Growth as probably the cheapest markets; maybe some emerging markets also as among the cheapest major markets in the world.

The economic backdrop is neutral to weakening, so we want to be in slightly more higher quality, lower beta, so to speak, investments, perhaps with a dividend orientation. Liquidity neutral, so it really doesn’t advantage necessarily borrowers or growth companies.

Psychology slightly positive, meaning that investors are nervous or worried. Nervous and worried investors have lower expectations than optimistic investors, and so in a world where reality and expectations converge to create market performance, lower expectations are better.

And then lastly, momentum. Momentum is positive, and in a secular sideways market, momentum is one of the most important factors engaging the direction of the market. So we still believe it’s worth taking a little extra risk here.

Our preference, as I said: Large-Cap Growth and emerging market, and underweight Small-Cap, underweight International large and small, and just stick with this little emerging markets and US Growth barbell.

And do you see the lack of volume that’s sort of plagued the market for a long time as an issue in any of this, or where does that fit in here? Is that psychological or is that a valuation issue? Why is it that there’s no conviction from the market?

Yeah, I think it’s more of a psychological and a little bit of momentum. Also technical that we’re not seeing the volume behind a lot of the moves that we’re seeing. But generally, it’s sort of a general distrust of the market, and you can’t blame a lot of investors who…we had a flash crash a year or two ago, and we still can’t explain how it happened.

And even what volume we do have in the market is high-frequency trading, and the jury is still out on whether or not that’s healthy for the market or not. So strip that away and you really don’t have volume, and that’s discouraging because I think we do want to see the markets really improve. And I think if they do, I think we will see investors slowly get back in.

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