Market Update: Why Value, Why Now?

In the weeks following the 2016 U.S. elections, the S&P 500 Index reached new record highs, and the Dow Jones Industrial Average finished above 20,000 for the first time ever on January 25, 2017. In a marked reversal of fortunes, U.S. value stocks outperformed their growth counterparts for a substantial part of 2016, and looked set to continue the trend into 2017.

However, by March, markets had hit the pause button on the Trump-driven reflation trade. The two failed attempts in March and April to repeal Obamacare, and the U.S. president’s flip-flopping on budget conditions and trade policies appear to have placed doubt in the administration’s ability to expediently pass future bills to lower taxes and raise infrastructure spending.

 

Calendar Year Returns

INDEX NAME 2010 2011 2012 2013 2014 2015 2016 YTD[1]
Russell 1000 Value Index (USD) 15.51% 0.39% 17.51% 32.53% 13.45% -3.83% 17.34% 3.88%
Russell 1000 Growth Index (USD) 16.71% 2.64% 15.26% 33.48% 13.05% 5.67% 7.08% 16.01%
Winner Growth Growth Value Growth Value Growth Value Growth

  

Don’t Give Up on Value Yet

Value may be lagging, but we still believe the trend can reverse. Why?

 

The broad equity market is expensive.

The S&P 500 is trading at a forward P/E of 18.75x, vs. the 10-year (actual) average of ~17x – and growth stocks are even pricier, at 21.37x[2]. Against this backdrop, value stocks, at a forward P/E of 17.14x, look relatively attractive right now.

Even more compelling, the portfolios of our two U.S. value-oriented funds – Purpose Tactical Hedged Equity Fund (PHE/PHE.B) and  Purpose Enhanced US Equity Fund (PEU/PEU.B) – are trading at an average forward P/E of 12.61x[2].

In addition, the U.S. economy is in good shape, regardless of whether campaign promises are implemented…

Value may be lagging, but the U.S. is still churning out positive economic data. This is particularly true on the employment front (the U.S. unemployment rate fell to 4.3% in May 2017, the lowest jobless rate since 2007).

In addition, the S&P 500 earnings growth for the first quarter of 2017 surprised mostly (75%) to the upside. And if corporations do eventually benefit from the promised tax cuts, EPS growth could continue to expand. With profit growth spread relatively widely, investors will likely opt for less expensive forms of growth.

…But if some of the U.S. administration’s long-stated goals do meet success, it could be the catalyst for another value run.

The early setbacks to the Obamacare repeal and the perceived negative events shadowing the White House lately have caused markets to retrench. However, the bill to repeal (and replace) the Dodd-Frank Act appears to be moving ahead. Should it pass the House and Senate, it could be a big win for value. Financials in particular would benefit. The scale-back, which includes the elimination of the Volcker Rule and reductions in capital and liquidity requirements, is likely to generate significant additional revenue and free up unproductive capital.

 

Ideas with Purpose: Our Value Proposition

Over the long term, relative value and quality are two factors that have tended to historically outperform. Given our favourable outlook, now is the time to re-focus on Purpose’s value solutions:

  • Purpose Tactical Hedged Equity Fund/ETF– FX-hedged (PHE) / non-FX-hedged (PHE.B). Conservative investors looking for a risk-managed way to participate should consider PHE, a portfolio of high-quality U.S. value stocks that tactically hedges market risk based on momentum trends of the S&P 500 Index. A non-FX-hedged version – PHE.B – is also available for clients who expect continued weakening of the Canadian dollar and want exposure to currency returns.
  • Purpose Enhanced US Equity Fund/ETF– FX-hedged (PEU) / non-FX-hedged (PEU.B). With its ability to invest up to 130% of its NAV in U.S. value stocks while maintaining market-level risk, PEU is an excellent choice for investors looking for an enhanced way to participate in the U.S. value rally. A non-FX-hedged version – PEU.B – is also available for clients who expect continued weakening of the Canadian dollar and want exposure to currency returns.

 

How We Stack Up[1]

PHE/PEU S&P 500 Index
Price to Earnings ratio 12.61x 18.75x
Price to Cash Flow ratio 7.96x 13.13x
Price to Book Value 2.98x 2.97x
Dividend Yield (Gross) 2.51% 2.01%

  

1Source: Bloomberg L.P., as at June 2, 2017.
2Source: Bloomberg L.P.; all data as at June 2, 2017. Value stocks as measured by the Russell 1000 Value Index (USD); growth stocks as measured by the Russell 1000 Growth Index (USD).

 

 

Commissions, trailing commissions, management fees and expenses all may be associated with investment funds. Please read the prospectus before investing. Investment funds are not guaranteed, their values change frequently and past performance may not be repeated.

Certain statements in this document are forward-looking. Forward-looking statements (“FLS”) are statements that are predictive in nature, depend on or refer to future events or conditions, or that include words such as “may,” “will,” “should,” “could,” “expect,” “anticipate,” intend,” “plan,” “believe,” “estimate” or other similar expressions. Statements that look forward in time or include anything other than historical information are subject to risks and uncertainties, and actual results, actions or events could differ materially from those set forth in the FLS. FLS are not guarantees of future performance and are by their nature based on numerous assumptions. Although the FLS contained in this document are based upon what Purpose Investments [and the portfolio manager] believe to be reasonable assumptions, Purpose Investments [and the portfolio manager] cannot assure that actual results will be consistent with these FLS. The reader is cautioned to consider the FLS carefully and not to place undue reliance on the FLS. Unless required by applicable law, it is not undertaken, and specifically disclaimed, that there is any intention or obligation to update or revise FLS, whether as a result of new information, future events or otherwise.

 

Return to Post Listing

Fields marked with an * are requiredLES CHAMPS MARQUÉS D'UN * SONT OBLIGATOIRES
Fields marked with an * are requiredLES CHAMPS MARQUÉS D'UN * SONT OBLIGATOIRES

ENTER THE WORD "ANTISPAM" INTO THIS BOX
(WITHOUT THE QUOTATION MARKS)