February 9, 2010

Large Cap Logic

This same logic can be applied the market as a whole. In this era of tighter credit and more prudent spending, large U.S. corporations have significant advantages over their smaller counterparts. Investors will flock to these shares, especially those with sound dividends, while small company stocks will remain relatively unloved.

Worldwide economic growth will continue to be uneven. While emerging market economies and commodity-led countries enjoy garish expansion, developed countries will lag. Exposure to these markets is a prudent hedge against inflation. Further, many of these countries have better balance sheets and higher yields than U.S. bonds. As a result, the fixed-income markets in these countries are particularly appealing, and have less downside than their corresponding equities.

With last year's investment gains led by assets that had become too cheap, one may wonder if there are any bargains left. One dark horse to consider is Japan. Facing a host of economic and cultural problems, an aging workforce, and fading domestic consumption, 65% of Japan's companies are trading below book value. Nonetheless, the larger companies in Japan that are more export than domestic focused should do well. In my view, large-cap Japan represents a near-perfect combination of contrarian and value characteristics.

Ben Warwick (ben@qesinvest.com) is chief investment officer of Quantitative Equity Strategies LLC in Denver, and Memphis-based Sovereign Wealth Management, Inc.

See More of Ben Warwick's Portfolio Gourmet Blog Post

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