The prospect of higher U.S. growth this year has reignited interest in value stocks over growth investing.
The past decade’s low-growth, low-yield environment led investors to seek growth stocks that stood out among general economic weakness. Given that stronger economic growth is expected to lift more company earnings across the board, asset managers are retreating from high-priced growth stocks and looking for value in names.
While growth was low, investors looked to scarce growth stocks like Alphabet Inc., Amazon.com Inc. or Facebook Inc. But amid so-called Trumpflation and an anticipated Great Rotation this year from bonds to stocks, growth stock valuations are now seen as relatively high.
“When growth accelerates, as we’re expecting it might, lots of companies are able to grow reasonably well. In that scenario, what the market tends to do is gravitate to the cheapest stocks, which is value,” Bruce Cooper, chief executive and CIO of TD Asset Management, tells Advisor.ca.
Cooper, who uses forward (estimated) EPS as opposed to trailing EPS, says he has found value in U.S. financials, particularly banks. JP Morgan’s share price has gained more than 20% since the U.S. election and its estimated 2018 EPS has risen to 12 times earnings from 10 times, he notes.
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“We don’t view 12 times as ridiculously expensive. It’s probably gone from very undervalued to […] attractive,” Cooper says. “In our portfolios, we have liked U.S. financials and continue to like U.S. financials.”
Corporate tax cuts
Of Donald Trump’s core policy pledges, Cooper sees U.S. corporate tax cuts happening this year, which would have a more immediate impact on company earnings than economic growth. If Congress passes a bill with tax cuts by the summer, companies could be reporting higher earnings in the second half of 2017.
That could buoy U.S. equities, along with talk of stimulus.
“The equity market does tend move ahead of the actual economic activity. Even if there’s just a conversation about fiscal stimulus next summer, that could be reflected in the stock market next year,” he says.
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Though Cooper focuses more on the S&P 500, he expects the Dow Jones Industrial Average to break 20,000 points this year, a symbolic marker more than a meaningful one. It was down slightly on Tuesday to 19,833.90, after reaching a record 19,999.63 in early January.
“I remember the catchphrase years ago, ‘10,000 in 2000,’” he says, referring to hopes in the 1990s that the Dow would hit the 10,000 mark by the year 2000. “It’s been a long grind from 10 to 20, because we got there in 1999 and here we are in 2017. It took 18 years to double in value.”
Border adjustment tax
While overweight on U.S. equities, Cooper says he’s neutral on Canada, in part because of talk in Washington about a border tax.
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Canadian corporate earnings could be hampered by a border adjustment tax as part of tax reforms being pushed by Republicans and House Speaker Paul Ryan. A border tax supported by Trump, with the intention of boosting U.S. manufacturing jobs, could dampen Canadian exports like auto parts and aerospace (U.S. oil and gas imports would probably be exempted under the proposal).
“We prefer the U.S. to Canada,” Cooper says. “We do expect U.S. growth to accelerate in 2017 versus 2016 […] but it doesn’t mean we’re off to the races. We’ve had a broad view that we live in a low-growth world, which is still in place.”
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