“We’re seeing much more evidence” that housing is recovering, he told attendees at DB’s markets outlook meeting Wednesday morning, noting that this makes moves to re-enter the origination business “more likely.”
“The housing sector is better,” LaVorgna said, “The question is, how much?”
David Bianco, U.S. equity strategist, has been advising overweighting some industry stocks but underweighting others he said he considers to be “defensive bond substitutes.”
He told this publication the division is based on the greater potential he perceives for gains that are relatively higher in sectors like capital markets, commercial banking, consumer finance, diversified financial services and insurance. Based on relatively lower price-to-earnings ratios and sector earnings-per-share estimates, in contrast, there is an “underweight” recommendation on thrifts and mortgage finance, real estate investment trusts, and real estate management and development.
Bianco said in a report from late last year that was referenced during the meeting that housing is expected to be a significant driver of gross domestic product growth, but not S&P 500 EPS growth. The report notes that the S&P 500 stock index’s direct exposure to housing has been roughly about 1.5% of EPS.
The equity strategist recommended global exposure in the equity sector, indicating there is a relatively stable outlook for Europe, expected growth in Asia, and “respectable” growth in the United States.
When asked about commercial real estate, LaVorgna said that there has been modest, uneven improvement in the nonresidential sector. He added that the improvement in home prices combined with the historic correlation between residential and commercial sectors “probably speaks well” for the commercial construction outlook.
Risks to the domestic outlook mentioned during the meeting included continuing political wrangling over fiscal issues and what might happen when government quantitative easing programs aimed at putting downward pressure on rates unwind, something LaVorgna said would be difficult to gauge as it is “uncharted territory.”