Equity PM at Capital Group weighs in on drawing false parallels, the ‘value vs. growth’ debate, and dividends’ continued value
The past pandemic year has been painful and devastating for many investors. But for some, it’s also been an opportunity to take stock and re-learn some valuable investment lessons.
In a recently published commentary, equity portfolio manager Steve Watson recounted how, including the COVID-19 pandemic, he has gone through 21 market traumas over the course of his investing career.
“My list suggests we get [a market disruption] every 18 months or so,” Watson said, citing episodes including the fall of the Soviet Union, the 2000s’ dot-com burst, and the global financial crisis. “No one could have predicted the pandemic but, in hindsight, it would have been wise to consider the chance that something would come along and disrupt the incredible bull market of the previous decade.”
While history can be a useful guide, Watson cautioned against drawing false parallels between the present and the past.
Because of his experience in Hong Kong during the worst of the 2003 SARS epidemic, he said he made oversimplistic comparisons between that health crisis and the current one. Many investors who made the same mistake, he added, have been caught off-guard by the extent and duration of the COVID pandemic.
“I was also similarly surprised by the swiftness and power of the U.S. governmental response — both fiscal and monetary — to the COVID crisis,” Watson said, noting how it arguably helped cushion the blow to his pro-cyclical positions in the early months of 2020.
While he hesitates to use the terms “value” and “growth,” he admitted to having a strong inclination towards value, but remains “a strong believer” in tech-sector resilience. He argued that finding the right entry point is key, noting that many of his tech-related holdings are long-term investments he bought long before the market saw their potential.
“I like to purchase shares when they are down and out, but I also like to hang on long enough to let the market catch up with what I think is the true value of the company in question,” he said, adding that his limited selection of tech names proved valuable during the worst days of 2020. “As these stocks rallied amid the pandemic, I gradually trimmed some of them to make room for more unloved areas of the market, including energy, financials and travel.”
Dividends saw a jolt during the early months of the pandemic; questions were raised about the practice of rewarding shareholders with cash when that could be used for other aspects of companies’ businesses like employee pay, for example. But Watson asserted that dividends are a key mechanism for companies to transfer value to investors, and that’s become more important than ever.
He also sees dividends as a stabilizing factor during times of market turbulence, though he acknowledged that property has grown weaker and appeared to vanish altogether at times in 2020. Still, he stopped short of saying yield is useless.
“Our current unprecedented monetary conditions, coupled with the market’s devotion to fast-growing, society-changing companies, have tossed aside lots of historical norms,” he said.
Finally, he maintained that his outlook today is the much the same as it was in the first quarter of 2020. He is fully invested with expectations that global markets will be higher in a year, with a tilt toward companies he believes will benefit from a reacceleration in global growth. Supporting that view is copper prices, which bottomed in late March and are now suggesting a mounting recovery in the global economy.
“I am also finding more attractive opportunities outside the U.S.,” Watson said. “In my view, the rest of the world, particularly emerging markets, are currently far more attractive from a valuation perspective than the U.S., and my portfolios generally reflect that view.”
