State Street’s Sector Picks For 2016

December 30, 2015 Let’s talk about technology, another sector you feel investors should consider, and in particular, the Technology Select Sector SPDR (XLK | A-92).

Mazza: Well there's been an increasing amount of attention paid to some of the larger names, of course. Many of them are associated with the so-called FANG stocks [Facebook, Apple, Netflix, Google] that were one of the only sources driving markets positively in 2015. We think the greater opportunity set continues to be there in a slow-growth environment. Investors will pay extra for earnings growth. And technology is going to be one area where we see that in 2016.

Some of the more innovative technology plays have made their way into something like XLK, which can augment what you may be getting with the more narrowed concentration of the FANG stocks. We expect to see bottom-line and top-line growth in technology. There's been quite a bit of pent-up demand for spending in the technology space, particularly at the corporate level. So your technology thesis is tied to more capital expenditures on the corporate side?

Mazza: Correct. We’re not seeing broad-based retail technology sales necessarily do that well. It’s really concentrated on these must-have items. For corporations, some must-have items are improved cybersecurity or improved technological platforms to make them compete with companies that, frankly, may have been more innovative than they were. Let’s touch on the health care sector, where you spotlight the Health Care Select Sector SPDR (XLV | A-94). Do you continue to expect “Obamacare” to push health care stocks higher?

Mazza: We really want to hone in on areas that can provide some attractive earnings growth. We know there are some head winds out there from the political side, but most of that is going to be concentrated more at the biotechnology or pharmaceutical areas. We think a broad-based health care fund may be a more attractive way to play health care.

Demographics for health care remain positive, particularly for U.S.-based health care firms. We think this is a sector that will see earnings growth in 2016, whereas other areas may actually continue to be compressed. Can you talk about energy, which isn’t a recommended sector of yours? However, there have been pretty heavy inflows into the Energy Select Sector SPDR (XLE | A-92) of late. With XLE down more than 20% for the year, some investors are seeing a value proposition there.

Mazza: XLE has seen some of the best inflows all year of any of our sector products. The money that’s going into the energy space seems to be long-term investors looking at the valuation opportunity. When we look across the market, though, we’re not confident that oil prices have necessarily found a bottom. We think that there continue to be issues with oversupply and questions about demand. And some of the weather-related issues have certainly not helped of late as well.

While the valuation opportunity is attractive with energy, we’re not necessarily looking to step in there yet. If you look at the forward price-to-earnings ratio, energy doesn’t necessarily look very attractive. If I look at trailing earnings, it does. So the expectation for energy companies, we think, may continue to disappoint, while some folks think they may start to see improvement.

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