Betting on a broad recovery has become the contrarian trade of the year

Martin Pelletier: For those looking to position around this, a great first step is to look at indices' sector weightings

The economy may be recovering from the shock of the pandemic, but it’s clear from where investors are putting their money that they remain concerned about just how long it will take for life to return to normal.

Throw in the potential for a second wave, the uncertainty around a U.S. election and the potential for a Canadian one this fall and it isn’t surprising to see investors herd into segments of the market that are perceived to be “safe,” in particular high-flying technology stocks.

As a result, the ultimate contrarian trade nowadays has become one that positions for a broader recovery.

Interestingly, despite record low interest rates and trillions of debt-induced fiscal stimulus,?the bet against a recovery has been so profound that according to Bank of America research, value stocks have posted their worst decade ever and have given up 20-years of relative gains in the last three years. They are also trading at their biggest discount to growth stocks ever, including the dot-com bubble.

Story continues below
This advertisement has not loaded yet, but your article continues below.

As a result, sectors such as financials, energy and real estate have lagged considerably to others such as information technology and consumer discretionary. Take a look at the Canadian banks, which are trading at approximately 10.5 times earnings versus 18.5 times for the S&P TSX, also their largest discount in two decades.

At least the Capped Financials are still up 18 per cent over the past five years compared to the Capped REIT index, which is now flat at about two per cent. The energy sector, meanwhile, has been completely gutted, with the Capped Energy Index down 56 per cent over the same period.

It’s not all bad news for energy, though.

Fidelity made an interesting observation in its last quarterly sector update, noting that since 1966, in the 12-month period following a year-over-year energy demand decline, the sector has outperformed the broad market up to 80 per cent of the time depending on the level of inflection. ?More importantly, the report said, “the odds have been even stronger after demand started to rebound, especially following times that energy had led the market down into recession — and both situations apply now.”

The same report also noted the impressive 33 per cent savings rate in the U.S. and that as of May, roughly three-quarters of workers thought they’d be rehired, which is well above what people normally expected during a recession. These trends, combined with the recent spike in business lending, are good news for financial stocks, which currently have the second-lowest relative price-to-earnings and price-to-book ratios in the S&P 500 at the moment.

Story continues below
This advertisement has not loaded yet, but your article continues below.

For those looking to position around this, a great first step is to look at the sector weightings among the global indices.

For example, the S&P TSX has a 28.6 per cent weighting to financials and 13.6 per cent to energy compared to the S&P 500 that has a 10.1 per cent weighting to financials and a paltry 2.8 per cent to energy. The MSCI EAFE index has a 16 per cent weighting to financials and a 3.1 per cent per cent weighting to energy. Then there is the MSCI World index, which holds a 66 per cent weighting to the U.S. followed by Japan at 7.5 per cent and Canada at only 3.1 per cent.

Understanding these breakdowns can allow investors to tilt their portfolios towards a post-pandemic recovery. Those not wanting to make such a strong call can rebalance more generally by taking profit from the growthier areas of the market — such as the tech-heavy S&P — and redeploying into undervalued areas such as financials and the energy-heavy Canadian market.

Overall, while the economy may not look exactly the same post-pandemic, history has shown that it will ultimately recover. And this time, unlike during the great financial crisis and other downturns, you have central banks working with governments to combine monetary and fiscal policy in unprecedented ways to boost the economy. In our opinion, investors will want to be on the right side of that trade.

Martin Pelletier, CFA, is a portfolio manager at Wellington-Altus Private Counsel Inc. (formerly TriVest Wealth Counsel Ltd.), a private client and institutional investment firm specializing in discretionary risk-managed portfolios, investment audit/oversight and advanced tax and estate planning.
View on Financial Post
We apologize, but this list has failed to load. Try refreshing your browser.

This Week in Flyers

首播影院-电影大全 - 高清在线观看 - 海量高清视频免费在线观看