CEO says that while cyclicals are performing better, many are 'running hot' and investors must never forget fundamentals
The continued accommodation of government and central banks means investors must place greater emphasis on company-specific opportunities and fundamentals rather than leaning too heavily on one sector.
That’s the view of Kevin McCreadie, CEO and CIO at AGF Management Limited, who explained that there has already been a significant shift from what led the market higher over the past few months as opposed to the early part of the recovery.
The initial surge off the bottom came as investors piled into stay-at-home technology stocks that were clear beneficiaries of the economic lockdowns put in place. By the fall, however, that trade started to give way to value stocks, while cyclical areas of the market started to perform better on the promise of vaccine rollouts and a slow reopening of the economy.
“If anything, that bias has only become more accentuated in recent weeks and it’s very likely to persist for as long as it takes the economy to fully recover and move deeper into this new cycle,” McCreadie said.
“In turn, that could lead to an extended period of outperformance for financials, industrials, energy and materials, while at the same time giving a boost to small-cap stocks and regional markets such as Canada that have a heavy concentration in the sectors just mentioned.”
However, he urged investors to be selective moving forward as the cyclical trade is already "running hot". Fundamentals, therefore, must be relied upon more after playing a diminished role in the earlier months of the recovery.
He added: “This doesn’t go for cyclicals alone. The value versus growth dynamic that has largely defined markets this past year isn’t as simple as it sounds. Outperformance of one over the other can often change on a dime as it did for a few weeks earlier this year and the lines between factors can easily blur over time.
“As such, ‘either/or’ portfolios that lean too heavily in one direction are far more susceptible to bouts of volatility in the market than is a portfolio that uses a diversified ‘barbell’ approach that capitalizes on the market’s biases without wild abandon.”
