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Confused by Mario and Janet? Be reasonable, try GARY

Investors have spent the last few years betting with the U.S. Federal Reserve and the European Central Bank as monetary policy dominated fundamentals, leaving many somewhat stumped about what to do next as central bankers seemed to carry more risk and less reward.

The ECB's President, Mario Draghi, let investors down with a flawed communications strategy this month. The trades went on for a beefed-up bond-buying package and a deeper move into negative territory on deposit rates. The markets got a taste of what they wanted but it was only a morsel versus the banquet they were anticipating.

This week's Fed decision also has the potential to fall flat. Strong intraday swings on the Dow last week point to skittish sentiment, far from ideal when the market is meant to have already priced in the first interest rate hike in nearly a decade. Investors are already nursing flat to negative returns on equities stateside which allows no room for disappointment.


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The zero margin for error comes as Janet Yellen faces the complicated task of lifting rates while encouraging investors to stay upbeat about economic prospects and managing expectations around further interest rate hikes. It suggest the rather easy trade of going long risk assets while the two central bank chiefs Mario and Janet stimulate, is no longer going to serve up much in 2016.

Enter GARY.

So who is GARY? GARY has been right under our noses but overlooked amid the hype around new technology and disruptors with huge valuations. Neil Campling, TMT Analyst of Aviate Global explains the new acronym developed by his company.

"The GARY principle is Growth And Reasonable Yield. Be selective and don't invest on a hope cycle but invest in real and tangible companies," said Campling.

He cites the UK based company ARM as one that he would consider worthy of GARY inclusion.

"There are companies that fit the criteria of a reasonable multiple, reasonable yield and a stock that's trading below its historical multiple. So I can buy a stock if it's growing top line at 20 per cent, I'm happy to pay a 25-30 times per multiple for that, it's not 300 times. You'd be surprised that companies like ARM make it in terms of their returns over the last three years in a low growth environment," said Campling.


Pension funds who are stable yield-lovers are quick to agree the principle has merit.

"I think as we move into the back end of this bull market companies that are able to demonstrate the ability to deliver growth and income are going to start to become very highly prized and very highly valued," said Tom Stevenson, Investment Director of Fidelity.

Stevenson had already been questioning the risks of chasing the technology boom.

"I've been here before, its 1998 all over again with the hope that is being placed on this sector and it's a function of living in secular stagnation, a low-growth world with so much hope being placed on the technology sector to innovate and drag us further, it feels like we are brewing up another 1999 (technology bust)," he said.

The history lessons abound with Aviate Global comparing GARY to investing in the 1960s and 1970s when the so called Nifty Fifty were the 50 large cap growth stocks to own and hold on the New York Stock Exchange.

"It's like a new Nifty Fifty - and the stocks that we have analysed still have a multiple that is half the value of the Nifty Fifty back in the day," said Campling.

Where does this leave the high growth FANG (Facebook, Netflix, Amazon and Google) and BAT (Baidu, Alibaba and Tencent) companies that have lived on the promise of high growth in a low growth, low return landscape?

"Be selective where you put money to work. There are still some big themes that continue in 2016, " said Campling.

"Netflix is overhyped, expensive and easily displaced by Amazon Prime. Facebook is a global platform company and will continue to work next year. Out of the Chinese names, Tencent will be the one that works," said Campling.

He also cites 2016 as a big year for virtual reality and semi-autonomus vehicles.

Investors are desperately in search of a theme for 2016, maybe GARY has arrived at the right time.


Karen Tso is an anchor on Squawk Box Europe. You can follow her on Twitter @cnbckaren.

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