Forget Geopolitics, Watch the ISM: Strategist

Investors should use recent losses as a chance to buy and ride stocks higher in the second quarter, according to Philipp Bärtschi, the chief strategist at Sarasin in Zurich.

"We do not think that high oil prices and the serious blow to growth in Japan will drag on global economic growth excessively," Bärtschi said.

Instead, with growth strong in the US and Europe, despite the debt crisis, investors should prepare for that he describes as Phase Two of the Institute of Supply Management's manufacturing index cycle, Bärtschi said.

"In the first phase, the ISM index rises from its low to a level of 50, which marks the threshold between contraction and expansion in the manufacturing industry," he said.

"In the second phase, the ISM Index climbs from 50 to its peak. In the third phase, the ISM drops from its peak back to 50. In the fourth and final phase, the ISM Index drops from 50 to its nadir."

In Phase Two, global stocks have risen by 11 percent since 1995 and Bärtschi said he believes we have already entered this stage, which will peak in the second quarter.

What to Buy?

If you agree with Bärtschi’s assessment, then you should look at the oil sector and cyclical stocks but avoid technology, he said. "The technology sector is likely to suffer the most from production stoppages in Japan and we anticipate disappointing earnings results in the next two quarters."

"The situation for the energy sector looks different," he added. "Due to higher oil prices, analysts’ earnings estimates are still much too low, and we expect to see further upward earnings revisions. The energy sector is also supported by the fact that it is a winner in Phase Three, which is likely to begin in summer 2011 at the latest."

Now is the time to buy despite, numerous risks facing the market globally, Bärtschi said.

"A decline in risk aversion would probably trigger a strong surge in equities in the near future," he said.