US Markets

It’s time to fade the rally in financial stocks: Strategist

Broad support for improving US infrastructure: Eaton Vance

The outlook for financials has improved in recent months but not enough to justify a continuation of the sharp sector rally seen since July, says Eaton Vance's leading equity strategist.

As several U.S. equity markets - namely the Dow Jones Industrial Average, S&P 500, NASDAQ and Russell 2000 - hit fresh all-time highs during Thursday's session, the U.S. financials sector also reached its highest level since 2007, as it continued on track to notch up its fifth positive week in a row.

But speaking on CNBC's Squawk Box, Eddie Perkin, chief equity investment officer at Eaton Vance, said investors should be more mindful of where they're putting their money.

"I think that there's a little bit too much enthusiasm right now for certain parts of the market," he commented.

Truck drivers navigate a rain-covered highway on the outskirts of Chicago.
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Perkin pointed to the "huge" amount of sector rotation seen in recent months, saying he was now looking to buy areas that had been unloved of late, suggesting healthcare and technology could be worth a look.

Turning to the transport sector, Perkin advised burrowing down into its various subsectors given the differences in fundamentals between industries such as airlines, rail and trucks.

With regards to the latter, he highlighted that U.S.trucking was very domestically oriented so could work as a long play on the U.S. economy. It would also be a key beneficiary of President-elect Donald Trump's pledge to cut the current 35 percent corporate tax rate.

"Lower corporate taxes in the U.S. is the biggest positive coming out of Trump's proposals," Perkin noted.

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Moving on to U.S. financials, which have seen a substantial rally since the sector's sell-off in the wake of Britain's vote to leave the European Union (EU) in June, the equity strategist at the $336 billion mutual fund manager said it could be time to look beyond these stocks.

"Fade the rally in financials, be willing to buy the dips in sectors that have underperformed like healthcare and technology," he recommended.

"And don't get caught up in a singular narrative, think through the range of outcomes as 2017 unfolds."

But Perkin's position was challenged by Hans Redeker, global head of foreign exchange strategy at Morgan Stanley, who argued the outlook for banks was attractive.

"Financials are in pretty good shape simply because the situation on the yield curve is changing and on top of that we have to think about deregulation of the financial sector," Redeker posited, asserting that Trump needed the banks' balance sheets to fund his ambitious growth-oriented policy proposals.

While acknowledging the positive dynamics for financials, Perkin pointed to valuations, saying that much of this good news was already priced in.

"The outlook is better for banks than it was six months ago but is it 50 percent better? That's where I'm fading the rally."

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