In this bull run, what’s a balanced investor to do?

Despite global trade tensions, increased volatility and rising yields, the market’s bull run continues. But Canadian investors might be wondering what all the fuss is about—as well as whether value investing makes sense in a market of earnings growth.

“If it doesn’t feel like a raging bull market right now, perhaps that’s because it’s really only playing out in one pocket of the market—U.S. technology,” says BMO senior economist Robert Kavcic in a weekly equity market report. (Make that two pockets if you include pot stocks, he adds, which gave the TSX a boost last week.) Within the U.S., technology and consumer discretionary are up 30%.

The bull market might feel “all but nonexistent” for Canadian investors with balanced portfolios who are often overweight domestic equities, says Kavcic.

“A balanced portfolio with 40% bonds and 60% equity, split evenly between Canada and the U.S., would be up about 6% in the past year,” he says. “Not bad, but no Nasdaq.” (The Nasdaq is up more than 24% year over year.)

Does value investing still make sense?

With the technology sector making significant market gains, investors might be wondering where value investing fits in to their investment strategies.

The recent performance of “new-economy growth companies,” like tech, which trade on increasingly large multiples of estimated forward earnings, has led to underperformance of many value strategies since the end of 2016, says Olivia Engel, CIO at Australian firm State Street Global Advisors, in a blog post.

“Good-value, ‘cheap’ growth stocks generally perform better than bad-value, ‘expensive’ growth stocks, across both high- and low-growth market segments,” she writes in a subsequent post. But that hasn’t been the case this year.

In fact, value has never underperformed in its history to the extent it is now, says Stephen Duench, vice-president and portfolio manager at AGFiQ, in a video post. Compared to other factor subgroups—growth, momentum, quality and low volatility—”value is on an island by itself,” he says.

Normal factor performance is a step-wise hierarchy, he says, with each factor outperforming in turn. Because of value’s current extreme underperformance, it’s highly likely value will regress to its long-term average per its historical performance and relative to other factors, he says.

Likewise, Engel assesses market data from the eras of the global financial crisis and dot-com bubble—the most recent periods when value went unrewarded amid growth as it is today. In each case, “value’s performance bounced back,” she says.

While she acknowledges the financial crisis and dot-com collapse reflect unique market conditions, she says, “It would not be wise to ignore the similarity of the current environment to these extreme periods.”

She suggests investors find opportunities where growth and value intersect, effectively “assessing the value of growth stocks.” For example, the best opportunities among developed large-cap stocks are in healthcare across all regions, she says.

For more of Engel’s picks, read the full blog post from State Street Global Advisors.

Watch the AGF video post and read the full report from BMO.

Staff

The staff of Advisor.ca have been covering news for financial advisors since 1998.