- September kicked off a worrying downturn to an otherwise stellar year for markets.
- Every quarter Deutsche Bank asks its analysts for their best investment ideas for the next 12 months.
- This quarter analysts picked 27 stocks across 5 sectors, including financials, healthcare, and more.
The fledgling economic prosperity that has been characteristic of 2021 seems to be coming to a grinding halt.
September lived up to its reputation as the worst month for the market — known as the “September Effect” — with the S&P 500’s 4.8% decline this year far outpacing historical precedent.
October has a foreboding standing as the most volatile month for equities, given that the market suffered some of its worst crashes during this month — The Panic of 1907, the Great Depression’s “Black Tuesday,” 1987’s “Black Monday,” and the 2008 financial crisis all began in October.
With a tough month behind and a potentially worse month ahead, it can be hard for investors to decide exactly what stocks to buy now.
It doesn’t help that an increasing number of investors, such as Mike Wilson, chief US equity strategist and CIO for Morgan Stanley, are beginning to say that signs point towards an upcoming selloff. “As growth decelerates and financial conditions tighten, valuations are likely to fall from their lofty levels,” Wilson wrote in a September 27 note.
Taking these factors into consideration, analysts at Deutsche Bank recently released their quarterly top investment ideas to buy for the year ahead. Last quarter their picks returned 0.48% vs. the S&P 500’s 1.91%, but they’ve beaten their benchmark in three of the previous four quarters — in fact, the analysts’ picks over the last 12 months are up 41.72%, compared to the S&P 500’s 29.03% gain in the same time frame.
Deutsche Bank’s top investment ideas for the next 12 months
This quarter’s 27 names span five sectors: Consumer, Financials, Healthcare, Industrials, and TMT (Technology, Media & Telecommunications).
In the consumer sector Deutsche Bank’s stock picks are split between staples, which are necessary for living and are thus much more resilient to market volatility, and luxury discretionary products, which are elastic leisure goods such as restaurants or resorts.
With vaccination booster efforts underway the discretionaries sector has already begun to recover, although the Delta variant has put a pin in recovery for hotels and cruise lines, and an expected increase in interest rates from the Fed may prove detrimental for this sector.
If cyclical sectors such as discretionaries are negatively impacted, consumer staples will appear more attractive in relative terms — though many consumer staples companies are currently feeling the pain from global supply chain shortages.
The financial sector is even more sensitive to interest rate volatility. For the past couple of months, as macroeconomic conditions have improved earnings growth and balance sheets throughout the industry have been robust, as proven by the results of the latest Fed stress test. However, if these favorable economic factors disappear, this sector, and especially consumer lending, will likely be more adversely affected.
There are a number of long-term positive factors that will benefit the, including an aging population both in the US and worldwide, the increasing prevalence of obesity globally, and an emerging middle class in developing countries.
These factors spell an overall healthy outlook for this sector, which will allow it to remain resilient even in the face of an economic downturn. However, the healthcare sector also faces certain risks as lawmakers try to pass legislation to regulate prices and to increase taxes.
Industrials span a wide range of sub-industries, but this sector primarily deals with companies involved with the production, distribution, or provision of services and supplies.
Increased spending in infrastructure from the government, combined with the economic reopening, has helped inject growth into this sector. However, the industrials sector is very sensitive to volatility in fuel costs and bottlenecks in the supply chain, two issues that have only worsened even as the economy recovers from the depths of the pandemic.
Finally, the TMT sector has received a major boost since the pandemic began and people needed to seek new avenues for work and entertainment at home. While this sector is expected to continue growing thanks to the significant expansion of 5G networks, tech companies are facing increasing scrutiny from lawmakers these days, and some claim that stocks in this sector are overvalued.
Although Deutsche Bank didn’t recommend any specific ETFs to take advantage of sector trends, investors can gain exposure to these sectors with ETFs such as the Vanguard Consumer Staples ETF (VDC), the SPDR S&P Retail ETF (XRT), the Vanguard Financials ETF (VFH), the iShares U.S. Healthcare ETF (IYH), the Vanguard Industrials ETF (VIS), and the iShares U.S. Technology ETF (IYW).
Below are the top 27 stock picks across the 5 aforementioned sectors, along with the company ticker, market capitalization, current price, price target, and commentary from Deutsche Bank analysts.