WHY IT’S TIME TO START BUYING MULTINATIONALS AGAIN

After a healthy run by domestic S&P 500 companies on the back of stronger U.S. growth and a rising U.S. dollar, investors would be wise to take some profits on this crowded trade. That’s because multinationals have become more attractive on a relative value basis, the greenback’s valuation is rich, and growth is improving abroad.

The U.S. dollar is in correction mode as a result of a more dovish U.S. Federal Reserve, weakness in U.S. economic data, a current level for the U.S. dollar that implies a Fed Funds rate above three per cent, and a potentially tighter oil market.

Monetary policy is also more supportive outside the U.S., which is serving to reverse investor sentiment from deflationary to reflationary, particularly in the eurozone.

J.P. Morgan’s macro indicator suggests the U.S. is in the slowdown phase of the cycle, which historically favours higher-quality companies with stronger balance sheets and healthier margins — attributes frequently found in multinationals.

“Multinationals look attractive on valuation given that his- torically, they have traded at a significant premium to domestic companies,” said Dubravko Lakos-Bujas, the firm’s equity strategist. “This makes for an attractive quality at a reasonable price trade.”

Mu lt i n a t i o n a l s should therefore see a re-rating higher as earnings visibility is improving, margins are strengthening and they offer an attractive average shareholder yield of 5.1 per cent, compared with 4.2 per cent for domestic companies.

Lakos-Bujas also noted that multinationals currently have a higher-than-average short interest as a percentage of their float at 3.3 per cent, versus the 10-year average of 2.8 per cent.

Meanwhile, domestic companies have a below-average short interest of 3.6 per cent, versus an average of 5.1 per cent.

“The Street sentiment has turned sharply negative and is approaching levels seen during the recession, setting a low bar for positive surprise,” the strategist said.

And that could make this contrarian trade in multinationals all the more lucrative.