Candice Bangsund, CFA, is vice-president and portfolio manager, global asset allocation, at Fiera Capital Corp.
The past several months have been dominated by fragile market conditions as nervous investors digested a flurry of doomsday, trade-related headlines that have sparked fears of a pronounced global slowdown. However, there’s reason for optimism and further equity upside from here, even after the latest market upswing.
Importantly, we are likely past the point of peak pessimism on the state of the global economy, and there are some tentative signs that the worst may finally be behind us. The latest economic results out of the U.S., Europe and China have lent credence to the case for stabilization after several months of trade-related angst that’s battered the manufacturing space.
On that note, the U.S.-China trade spat has subsided amid some conciliatory signals from both sides and a willingness to come to some sort of truce that would remove a key headwind that’s been plaguing sentiment and growth. Encouragingly, tensions have receded and the odds of a de-escalation in the trade debacle have risen as President Donald Trump and President Xi Jinping get closer to signing a “phase one” deal.
Even policy makers across the world have stepped up and pledged their unrelenting support. The plethora of growth-enhancing efforts from both central banks and governments will likely help to nurture the record-long expansion. These stimulative measures should, in turn, revitalize the global economy and counter the turbulent political landscape at hand.
At the same time, questions have surfaced on just how much room equities can run given the impressive results to date in 2019. Rest assured, this bull market still has some legs. Indeed, year-to-date gains have predominately been driven by multiple expansion, whereby investors bid up what they were willing to pay for equities given the string of pro-growth measures from global central banks and speculation for an amicable outcome on trade.
The good news is that valuations are not yet in threatening bubble territory, especially given the low (and, in some cases, negative) interest-rate environment. Furthermore, earnings should play a more meaningful role thanks to a reinvigorated global growth backdrop. With so much gloom and doom on the state of the economy, the bar is low for an upside surprise to earnings forecasts and accordingly, equity prices.
Moreover, with on-edge investors spending most of 2019 piling into cash, there’s plenty of dry powder prime for redeployment back into the equity space should investors embrace that the worst is indeed behind us.
So where are the opportunities within the global equity space?
Interestingly, the 2019 equity market rally has been fairly “unloved." Investors have proven skeptical on the state of the economy and financial markets alike. As a result, the glaring outperformance of growth strategies has been the predominant theme versus their value counterparts – particularly as unnerved and growth-starved investors have propelled toward the high-octane sectors and regions of the world in search for “growth at any price.” However, the extended stretch of U.S. equity outperformance has likely run its course, with the growth-oriented S&P 500 likely priced for perfection at this time.
Looking forward, this growth-domination will likely unwind as investors embrace the improved fortunes for the global economy and the corresponding rise in interest rates. In this environment, investors will be in search for a compelling value proposition within the equity space. What’s more, above-average market valuations should also prove challenging for growth stocks, which will make it difficult for these overcrowded sectors to absorb higher interest rates. In turn, this should spark a rotation towards the under-owned and underappreciated value-oriented space, with important implications for the financial, resources and industrial sectors.
Emerging markets look particularly compelling at current levels. Positioning in the asset class remains far too pessimistic in the context of superior growth prospects versus the developed world, expectations for softer U.S. dollar conditions and undemanding valuations. What’s more, the reflationary impulse from policymakers in China and a ceasefire in the U.S.-China trade dispute should also alleviate some pressure on emerging market assets affected by the lingering trade tensions. In other words, a sharp reversal could be in the cards.
Similarly, the value-oriented Canadian equity market also remains an appealing place to invest, particularly as the S&P/TSX Composite Index trades at a steep discount to its U.S. counterpart. With close to two-thirds of the index concentrated in cyclically levered value sectors that have lagged this year, the S&P/TSX is a prime candidate for further upward momentum from here.
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