Why Merrill Is ‘Very Short-Term’ Hawkish

In the current market slump, “gather ye rosebuds while ye may.” That’s the message from Christopher Hyzy, chief investment officer of Bank of America Global Wealth & Investment Management. Good opportunities tend to evaporate quickly in this market environment, which is why improved corporate earnings growth has prompted Merrill Lynch to be “very short-term hawks” in this and the next quarter as it seeks opportunities in select sectors.

In a wide-ranging interview with ThinkAdvisor, Hyzy identifies and discusses these, and provides other insights into the firm’s current investing strategy, such as being overweight emerging markets.

Further, the CIO explores three key things that financial advisors need to watch closely in what he calls the “synchronized global recovery” now taking place, as well as forecasts when the next pullback will occur.

Asked about Merrill’s provocative new ad campaign stressing that it “…puts the interests of our clients first,” Hyzy discussed Merrill’s investment process but declined to address fee-based versus commission compensation as it pertains to the Labor Department’s fiduciary rule. The firm’s apparent reconsideration of its move away from commissions on new advised retirement accounts is “out of my subject matter,” he declared.

Last fall, the firm strongly supported fee-based comp for such new accounts. Recently, in a statement, it said that, while “We are continuing on a path to implement a fiduciary relationship for all retirement accounts,” based partly on client and advisor feedback “there may be limited situations where a fee-based arrangement may not be in clients’ best interest.”

For those cases, the firm is “considering potential alternatives” to its fee-based Investment Advisory Program “in a manner consistent with a higher standard of care.” It cites examples of “private equity and concentrated stock positions.”

ThinkAdvisor recently spoke by phone with Hyzy, who determines the firm’s investment view, and develops and manages asset allocation strategy and solutions’ due diligence, among other responsibilities. Here are excerpts from our conversation:

THINKADVISOR:  The current U.S. securities market and economic-political situation isn’t easy, is it?

CHRISTOPHER HYZY: No, it’s not. We’re going through a slow [market] slump right now, basically a 3% pullback. It’s really important to be realistic at all costs. We’re not going to see easy things for a long time. However, in the U.S., growth overall, the profit cycle, direction of employment and housing are well on their way to subtle, continuous slow improvement. It will be very hard for any changes in the next 12, or even 24, months to move those four things in a wrong direction and for them to be a cause for concern.

How do growth investors stand right now?

Many are on the sidelines waiting for signs that say: This is close to all-clear. But this isn’t a marketplace that’s going to give anybody the all-clear sign. However, we expect those folks to trickle in as markets climb the wall of worry. They’ll be slow to move into the equity side, and that’s why we don’t expect significant equity returns [this year] — more than likely 7% to 9%, including dividends.

What’s critical for all investors and advisors to keep in mind?

It’s important not to be a bear because in this market environment, opportunities are very difficult to stick for a long period — they come and go. If you’re an ultra-bear, you’re going to miss an opportunity that’s unfolding right now.

What’s that?

Earnings growth and revenue growth. So we prefer to be very short-term hawks in this current quarter and next, and look for opportunities in key sectors.

What’s driving the market at the moment?

The profit cycle is starting to pick up. That’s what has been missing in the last almost-three years. We think we’re going to see 9% to 11% earnings growth — and we’ll also get some revenue growth, which is the key distinction [compared to] what has occurred in the recent past. As we get close to the summer, we think the market will hit new highs.

What about corporate pricing power, which is usually a significant sign?

We’re starting to see some of that in key sectors filter into revenue growth. It’s not going to be tremendous or across all sectors, but it’s better than zero — and markets care about the improvement factor vs. things deteriorating. It allows the investment community to climb the wall of worry.

What’s the biggest threat to the market this year?

What we don’t know. Investors are starting to get comfortable with real U.S. GDP growth of around 2-1/2% and nominal growth of around 4% to 4-1/2%. We haven’t had that for almost two years. But any changes to that on the downside, and investors will go to risk-off mode and wait for signs that it’s coming back. [The other big threat] is an unforeseen geopolitical event.  

How much did Donald Trump’s election to the presidency and his agenda contribute to the positives you’ve mentioned?

We attribute about 5% of the equity outperformance ahead of this latest slump to so-called animal spirits; that is, what’s to come. It picked up business confidence.

When does the market become troubled again?

It starts to worry around the tail-end of the French elections and then when the next Fed hike is going to come. That’s when your next pull-back should occur. We’re not talking about a 5% or 10% pullback because that would have to include skepticism about the profit cycle and a pretty sizable unforeseen geopolitical event. But after that second pause, we expect flows to move from risk-off type assets into riskier assets like equities.

What particular things should financial advisors be watching?

They need to make sure they continue to see the current synchronized global recovery unfold and have confidence that that should continue through this year and well into 2018.  It does continue to gather good, but subtle momentum. The last time we had this type of recovery was between 2003 and 2006.

What else do advisors need to be aware of?

Valuations, but looking at that just in absolute terms is probably incorrect in markets like this. Looking at it on a relative basis is also incorrect, but you should build a framework and a score card. We still see more elements in favor of reasonable valuations than overvaluations.

What geopolitical events happening right now should advisors track?

The French election and, ultimately. the Italian election. In the U.S., fiscal [issues] running the gamut from potential tax reform, infrastructure [rebuilding] and any changes to the regulatory framework. Last but not least: China. It’s always disregarded when things are going well and always used as an excuse why things aren’t. It’s important to understand that China is going through a massive, long-term transformation.

You say we’re in a “synchronized global recovery.” How can countries plan to be in sync, or is it just coincidental?