For the Next Stock Market Rally, Watch The Quality Cycle

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Investors waiting to return to equities may want to consider the quality cycle, according to an article in the Risk and Reward report published by Invesco Perpetual of UK.

Bear markets and recessions are usually followed by “junk rallies” in which low-quality stocks take the lead and their outperform high-quality peers. These speculative rallies can last 12-14 months or even longer. For example, from the lows of March 2009 stocks rallied over 70% through March 2010 which can be considered as a “relief rally”. This rally leveled off by summer as the low-quality stocks had fallen out of favor and the “easy money” has already been made. High quality blue chips took the market leadership only to face lower earnings forecast and economic issues.

Equities Quality Cycle

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5-year performance of S&P 500:

From April 2010 through April this year, we had another rally which also fizzled as shown in the graph above. On September 30th, the Economic Cycle Research Institute announced that “the U.S. economy is indeed tipping into a new recession. And there’s nothing that policy makers can do to head it off. ” With the EU facing many unsolved issues and the US economy entering into a recession, equities may decline further in the coming months.

Related ETFs:
SPDR S&P 500 ETF (SPY)

SPDR DJ Euro STOXX 50 ETF (FEZ)

Disclosure: No Positions

Checking for Opportunities in Foreign Healthcare Equipment and Services Provider Stocks

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Healthcare stocks are generally considered as defensive stocks. So investors looking for a place to hide in the current volatile equity markets can consider this sector. In this post let us take a quick look at some of the foreign healthcare equipment makers and service providers traded on the U.S. markets.

The universe of foreign healthcare equipment and services stocks is small. Ten companies are listed on the organized exchanges and another 11 sponsored ADRs trade on the OTC markets.

Foreign Healthcare Equipment Makers and Service Providers listed on the organized exchanges:

[TABLE=1044]

Foreign Healthcare Equipment Makers and Service Providers traded on the OTC markets:

[TABLE=1045]

Lyon, France-based EDAP TMS S.A. (EDAP) is a maker of medical devices mainly for urological diseases. It develops and markets the Ablatherm device, an advanced choice for High Intensity Focused Ultrasound (HIFU) treatment of localized prostate cancer. For 2Q, 2011 revenues came in at EUR 3.8 million compared to EUR 6.0 for the same period last year. At Friday’s closing price of $1.75, EDAP has a small market capitalization of just $23.o million.

Fresenius Medical Care(FMS) is a German firm that provides a range of products for both treatment modalities, hemmodialysis and peritoneal dialysis, and is a full service provider of dialysis care. In August Fresenius announced plans to expand its presence in the U.S. dialysis market with the purchase of two U.S.-based companies – Liberty Dialysis and Renal Advantage and radiology center operator American Access Care Holdings – for a total of more than $2 billion. As a fairly large company Fresenius hopes to take advantage of pricing power in the U.S. market. At current prices, FMS has a $20.0 billion market capitalization and the stock pays a 1.35% dividend. While most equities are down this year, FMS is up about 17% YTD.

UK-based Smith & Nephew plc(SNN) is a global medical devices maker operating in the orthopedics, endoscopy and advanced wound management markets. For the second quarter, the company reported revenues of $1,077 million, up 5% relative to second quarter of 2010. Smith & Nephew also reiterated its outlook for 2011 with strong growth in all the three divisions.

Among the OTC-traded ADRs noted above, Raffles Medical Group Ltd (RAFLY) of Singapore looks interesting from an investment standpoint. Singapore has built a solid reputation in the healthcare business and medical tourism is projected to increase. With world-class facilities and easier access to many fast-growing Asian countries such as India, China and Indonesia, Raffles Medical should benefit in the years to come. Founded in 1976, the group is the largest private healthcare organization in Singapore and operates a network of family medicine clinics, a tertiary care private hospital, insurance services and a consumer healthcare division. It serves over one million patients and 5,500 corporate clients per year. Raffles operates a network of 74 multi-disciplinary clinics across Singapore, and four medical centres in Hong Kong and Shanghai. In addition, the group also manages the airport clinics in Singapore’s Changi International Airport and Hong Kong’s Chek Lap Kok International Airport. Located in the heart of Singapore, Raffles Hospital, the group’s flagship, offers a full complement of specialist services combined with advanced medical technology. The ADR is thinly traded and is about 8% down so far this year. For more information, please visit the corporate website here.

Disclosure: No Positions

Comparing Historical Real Returns of Select Developed Equity Markets

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Dividends account for a large portion of total returns especially over the term. Real returns – that is excluding inflation – include dividend yields, dividend growth and multiple expansion (P/E). The following chart shows the split of real returns of select developed countries:

Source: Risk and Reward, Research and Investment Strategies,1st Qtr 2011, Invesco

The importance of dividend yields and dividend growth to the total returns are clearly shown in the above chart. Over the past 40 years thru August 2010, these two factors have significantly driven real returns.

Instead of dividend growth, multiple expansion contributed heavily to the real returns of Japanese and U.S. equities.  Compared to Australia, Canada, France and Germany, dividend growth is much less in the US. This is not surprising since US firms are traditionally more inclined to reinvesting or accumulating earnings than increasing dividend payouts.

Related ETF:
SPDR S&P 500 ETF (SPY)

Disclosure: No Positions

Knowledge is Power: Financial Advisor, Emotions, Sustainable Capitalism Edition

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Investor fired his adviser and loaded up on dividend stocks

When Should You Use an Advisor?

China’s debt-heavy bosses go on the run

Fool’s gold

Why emotions and investing don’t mix

What’s the use of saving money?

Governments must act on rising long-term unemployment and youth joblessness

Citywire Top Stocks

Germany goes for sustainable capitalism

It is business, not the state, that creates jobs, by David Cameron

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Volkswagen car storage tower, Wolfsburg, Germany

15 Non-Financial European Companies with Large Government Ownership

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Some of the European governments still own large stakes in private sector companies. Traditionally sectors like utilities, airlines used to have large state ownership. With the bailouts during the financial crisis of 2008-09, some of the banks also are majority-owned by governments.

15 non-financial companies with state ownership of more than 10% are listed below with their current yields. This list comes from a research report produced by Morgan Stanley in March 2010. So ownership figures may have changed. Please do your own research before making any investment decisions.

Energy
1.Company: Eni spa (E)
Current Dividend Yield: 7.77%

2.Company: StatoilHydro (STO)
Current Dividend Yield: 5.39%

3.Company: Fortum (FOJCY)
Current Dividend Yield: 5.78%

Industrials
4.Company: Norsk Hydro (NHYDY)
Current Dividend Yield: 2.84%

5.Company: Metso Corp (MXCYY)
Current Dividend Yield: 7.08%

Materials
6.Company: Yara International (YARIY)
Current Dividend Yield: 2.40%

Telecom
7.Company: France Telecom (FTE)
Current Dividend Yield: 11.67%

8.Company: Deutsche Telecom (DTEGY)
Current Dividend Yield: 8.21%

9.Company: Telenor (TELNY)
Current Dividend Yield: 4.47%

10.Company: Telecom Austria (TKAGY)
Current Dividend Yield: 10.32%

Utilities
11.Company: Enel Spa(ENLAY)
Current Dividend Yield: 8.67%

12.Company: EDF (ECIFY)
Current Dividend Yield: 5.38%

13.Company: GDF-Suez (GDFZY)
Current Dividend Yield: 6.62%

14.Company: EDP Energias Portugal (EDPFY)
Current Dividend Yield: 7.61%

15.Company: Vebund (OEZVY)
Current Dividend Yield: 2.69%

Note: Dividend yields noted are as of September 29, 2011

Source: European Strategy 15 March 2010,  Morgan Stanley Equity Research

Disclosure: No Positions