Portfolio manager explains that shift from growth to value will play into country’s hands
Fiera Capital is neutral on equities for 2019 but is overweight Canada as it expects value sectors to outperform their growth counterparts.
Candice Bangsund, vice president and portfolio manager, Global Asset Allocation, believes this shift is an inherent positive for Canada markets, of which about two-thirds is pro-cyclical value-oriented.
In her global outlook for next year, Bangsund also explained why she believes:
- The environment of synchronized global economic growth will outweigh the uncertain geopolitical backdrop at hand, with all major regions contributing to global growth;
- A rise in trade protectionism, “stagflation” and geopolitical instability has the potential to derail global expansion, which warrants a cautious approach;
- The potential for periodic bouts of volatility prevails heading into 2019 as monetary policy transitions from accommodative to neutral;
- Fiera Capital maintains its underweight allocation to fixed income as they expect yield curves to steepen in the coming year;
- Fiera Capital will look to re-establish an overweight allocation to global equites at more attractive levels, with a focus on Canada and Emerging Markets.
She said Fiera is neutral on equities and is holding some cash after taking profits at the end of 2017 because of a feeling that valuations had run on too much and that a more volatile 2018 lay in wait.
Bangsund is “cautiously optimistic” moving forward – a sentiment based on the fact Fiera is looking to reset back to an overweight allocation of equities because of its belief in strong global growth.
She said: “Our basis is to use pockets of market weakness and re-establish that overweight in equities. We have yet to hit the mark. We are looking at 25 to 50 on the S&P 500, so we have come very close but we are just not there yet.”
The regional biases within the asset class include Canada. Bangsund argued that while FAANG stocks and discretionary stocks have been leading the outperformance in equities, as the global economy becomes increasingly self-sustaining, investors won’t be searching for growth at any price but will instead rotate into more attractively valued sectors like energy, financials and materials.
She said: “Canada’s market is very much a value play. We’ve got two-thirds of the market in pro-cyclical, value-oriented sectors, so we expect these to outperform going forward. Obviously in a rising interest-rate environment, the sector with the most overbought valuations are obviously the most vulnerable to a pull back and that is essentially what we’ve seen in the tech sector in the US, which has been hit hard with the latest pullback. That’s part of the thesis of Canada outperforming the US.”
Bangsund is underweight US equities, explaining that a lot of the good news is already baked in and that the strong earnings expectations can’t be expected to be repeated going forward. Emerging markets, however, get the thumbs up, with Fiera believing the valuations have been overdone and the bad news priced in.
She said: “We thought this was a good opportunity to increase our exposure. Actually, at the beginning of October we reduced our US and added to our EM allocation.
“It’s a story of fundamentals in emerging markets. The emerging world is developing at twice the pace of the emerging world – earning expectations are quite strong yet multiples have been contracting. We saw that as a disconnect and an opportunity.”
Synchronised global growth has been trumpeted for a while but there have been concerns it peaked. Bangsund, instead, believes a recalibration to more normal levels of growth is to be expected, with Europe still growing at an above-trend pace and the US expected to fire on all cylinders in 2019. She also expects a soft landing with China despite tariff concerns as there remains fiscal stimulus.
She said: “So while central banks are still stepping up and reining in some of their ultra-accommodative policies, the monetary backdrop is still supportive in general, allowing the economy to continue accelerating. We don’t see a major acceleration in global growth but we still expect a somewhat strong GDP in the coming year.”
The caution with all of this, according to Fiera, revolves around three potential risks, which she expects global growth to outweigh. The first is trade protectionism and the main players on this front – US and China. Bangsund, however, expects concessions to be made in order for an agreement to eventually be made.
The second risk is the political environment in Europe – from Italy’s budget showdown with the EU to the uncertainty around Brexit. Fiera is underweight European stocks as a result.
And the risk of “stagflation” has been diminished with inflation turning lower and the pullback in the crude prices over the past few months.
She said: “We’ve seen central banks run hot in the US. They want to make sure that pricing pressures reassert themselves on a sustainable basis. They don’t want to derail the expansion; they’ve got memories of 2008 clearly in their mind.
“So central bankers in the US, Canada, Europe and Japan are very cautious and in this scenario they are almost too cautious. What happens is it actually causes a big acceleration in inflation, where it spirals out of control and central bankers are caught behind the curve. It’s a policy error because what happens at the same time is growth is already slowing in the second half of 2019.”