Portfolio manager believes growth and value can work together as Canada's reopening gathers pace
The appetite and enthusiasm for the current market recovery is “startling”, according to one portfolio manager, who believes the pandemic could actually be an extinction event from some industries’ future fundamentals.
Martin Romo, equity portfolio manager at Capital Group, said that while there are clearly powerful cyclical implications, and fiscal and monetary policy that's incredibly supportive of the stock market, he remains cautious.
He explained: “There are some industries like commercial real estate and energy where COVID is a bit of an extinction event for their future fundamentals. To be clear, I don’t think these industries are going away, but the basis for making predictions about the fundamentals of their businesses has forever changed.”
He added: “Some industries will adapt and thrive after COVID; others may be more like dinosaurs and go into decline.”
After years of growth stock dominance, value stocks have emerged from the wilderness to really capture investor attention this year. For the three months ended March 31, 2021, the Russell 1000 Value Index recorded an 11.26% total return (in USD), far outpacing the 0.94% gain of the Russell 1000 Growth Index. The big question is will this rotation towards value-oriented shares prove to be a lasting one?
Romo believes it doesn’t have to be a case of one or the other. There can be growing companies that are cheap and cheap companies that grow, he said. “We are in a target rich environment, and there are opportunities to invest in fast-growing companies as well as classic cyclical companies."
A flexible approach, therefore, is the best step forward to embrace opportunities with classic growth stocks, cyclical stocks and companies in turnaround situations with the potential to generate capital appreciation.
Innovation sits at the heart of many of these exposures and Romo honed in on semiconductors as a generation-defining development that has the power to drive industrial development for decades, central to telecommunications, the internet, data analysis, artificial intelligence and cars, for example.
He added: “As World War II was a leap forward in mass production, COVID, I think, is a leap forward in the capabilities of the semiconductor.
“Recent chip shortages are a case in point. Companies can't get enough of them. Auto companies are struggling with their production costs, and countries are starting to say, ‘This is a strategic resource, and we've got to either develop our own domestic industry or find ways to capture production’.”