Risks For Markets Skewed to Upside; ‘Nowhere to Go But Equities’

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Investors have ‘nowhere to go but equities’ as risks for the stock markets are skewed to the upside, David Barse, founder and CEO of XOUT Capital, who noted that investors should be careful to stay away from value traps.

Barse’s investment strategy with the XOUT index is to eliminate the worst performing large-cap stocks that have a “risk of being disrupted” and could underperform their peers based on seven criteria: revenue growth, hiring growth, capital deployment, share repurchases, profitability and deposit growth (for banks), earnings sentiment, and management performance.

“The market is going through an interesting time now where you have outside influences like the Federal Reserve pumping up the market and you have the inability to allocate to any other asset class , and I look at fixed income, cash, and equities as the three asset classes to allocate to,” Barse said. “Gold, I put in a separate category, but clearly, there’s nowhere else to go but equities, so I look at the marketplace optimistically, and continue to believe that equities are the place to allocate capital.”

The elections may present a major risk to Barse’s bullish views on the equities.

“There are scenarios where the Republicans can lose the Senate in addition to the Presidency, and that, I think, will have a very negative impact on the marketplace, especially if regulatory reforms get underway in a short period of time,” he said.

A reversal of President Donald Trump’s tax reforms and additional regulatory oversights are some of the things that can become headwinds for equities should the Democrats take power.

COVID remains a risk, as even if a vaccine were to be introduced, it would still be a challenge to disseminate this vaccine to the population.

Gold’s role in a portfolio should be as a store of value, Barse said.

“I look at gold as a storehouse of value for those who have an uncertain view of the future and want an opportunity to be able to allocate some component of their capital to gold but it’s different in my perspective, from cash, fixed income, and equities, he said.”

Some of the companies excluded from XOUT’s index include Proctor & Gamble, JP Morgan, Verizon, AT&T, Coca-Cola, Exxon Mobil, Chevron, T-Mobile, Charter Communications, and Nextera Energy.

The index has outperformed the S&P 500 by 12% since its inception in July, 2019.

“In each case, these companies have scored poorly on our seven-factor model that we use to identify how to eliminate the bottom 250 of the 500 U.S. large-cap companies,” Barse said.

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