Portfolio manager says base cyclical stocks have started to catch up but that consumer-tech orientated names will still thrive
Tech stocks have carried the market but there are hints of a value rally as people adapt to the new normal.
Ian Riach, Senior Vice President and Portfolio Manager at Franklin Templeton Multi-Asset Solutions, said that while the FANG companies – or even the Awesome Eight, to go with the new, extended label – have accounted for a huge majority of the move in the S&P 500 this year, things are more dynamic than that.
He said: “A few stocks are up significantly, but there are many that are still down this year. We've seen a bit of rotation over the past month or so where more base cyclical stocks have started to catch up. Some have referred to this as a value rally.”
Riach believes those firms that produce the products and services that consumers and businesses not only want but need in this new normal, will continue to do well, although investors will want to see “true sustainable economic growth” before a significant value rally takes place.
He explained: “Then there will be a resultant rise in interest rates. These lower interest rates have supported multiples for the real growers but I don't think it means you go out and ignore paying a reasonable price for a stock.
“In our view, and some of the portfolio managers that we utilize in our programs, they see that there are many information technology and consumer tech-related stocks that have not garnered all the headlines that have done well but that still represent reasonable value.
“There could be some catch-up with some of the cyclical stocks but I do think that the tech-oriented and the consumer-tech oriented names are going to continue to perform well.”
Riach also addressed the state of Canadian banks and said the Big Six are in good shape and well-provisioned for the anticipated loan losses. He also believes dividends are safe and that yields remain attractive. However, in terms of growth, earnings will be tough to increase with the yield curve so flat.
He said: “There is not much difference between short term and long term rates, and banks make a lot of their money, their net interest margin, on borrowing at low rates in the short term and lending out longer term at higher rates.
“It's tough to make a buck right now in lending with the yield curve so flat. Where they have been making money is on the capital markets and trading side but this isn't really a stable as good old-fashioned lending. Banks are high-quality, safe dividend payers, but I wouldn't expect too much growth or capital appreciation until we see a recovery.”
