Market Experts See Slow Growth, Increased Volatility, and a Comeback for Active Management
Three prominent Wall Street strategists recently shared their outlooks for global financial markets with Canadian investment professionals gathered in Toronto for the CFA Society Toronto’s 57th Annual Forecast Dinner. Charles Brandes, CFA, founder and chairman of Brandes Investment Partners; Russ Koesterich, CFA, chief investment strategist at BlackRock; and Christian Stracke, global head of credit research at PIMCO, spoke with guarded optimism, and their predictions included calls for slow growth, increased volatility, and a comeback for active management.
Their presentations are summarized below.
Charles Brandes is the author of Value Investing Today and is a value investor in the mold of Benjamin Graham, so it was fitting that he began by quoting Graham:
“Everybody in Wall St. is so smart that their brilliance offsets each other. And that whatever they know is already reflected in the level of stock prices, pretty much, and consequently, what happens in the future represents what they don’t know.”
- Stocks in Europe and emerging market will outperform those in the United States and Canada: European and emerging market stocks are currently valued near historic lows versus those in North America and investors should expect some reversion to the mean over the next three years.
- Active management will come back into favor: Over the next five years, a gradual shift in sentiment back towards active management should occur. Total emerging markets assets invested passively have gone from 11% to 50% course since 2002, and Brandes thinks this trend will soon reverse.
- Equities will beat bonds by the largest margin on record over the next 30 years: While he sees stocks in North America as fully valued at present, Brandes sees global equities as the place to be over the next three decades.
Brandes closed with more wisdom from Graham: “What happens in the future we don’t know. If you base your decisions on value, you will.”
Russ Koesterich is author of The ETF Strategist and The Ten Trillion Dollar Gamble.
- Get used to slower nominal growth: Growth in most major developed markets will be stunted over the next decade due to adverse demographics (an aging population with a declining propensity to consume), increased costs associated with carrying high debt levels, and a continuing trend of lower inflation-adjusted wages. Koesterich noted that inflation-adjusted wages for men in the United States peaked in 1974.
- Long-term rates are headed higher in the United States: Improving economic conditions and impending rate hikes from the US Federal Reserve will result in moderately higher long-term interest rates one year from now.
- Volatility is on the rise: Geopolitical turmoil and the pending rate hike from the Fed has nudged volatility higher of late and investors should expect this increase to continue over the next year. “The smooth ride for equities is coming to an end,” says Koesterich.
Christian Stracke opened by noting, with tongue in cheek, that “things are pretty boring in Newport Beach right now,” a not so subtle reference to the recent departure of PIMCO co-founder Bill Gross, CFA.
- A market correction is not going to happen anytime soon: The excesses of financial leverage that we saw in 2008 are not present today, thanks in part to regulatory standards like Basel III. Stracke is confident the Fed will avoid hiking rates too quickly and said commonly cited concerns about geopolitical conflicts and an economic slowdown in China will have just a marginal impact on financial markets.
- Credit spreads will be broadly unchanged over the next year: Ample liquidity and strong corporate profits will prevent credit spreads from widening significantly.
- More inversions to come: US firms will continue to take advantage of lower corporate tax rates abroad.
Stracke also cautioned about the deteriorating quality of debt issuances, including covenant-lite loans.
This November, at the Equity Research and Valuation Conference in Boston, Charles Brandes, CFA, will share lessons learned from his career as a Benjamin Graham-style value investor in his presentation “Enduring Principles of Value Investing.”
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Warren Buffett himself once wrote an article explaining how Benjamin Graham’s principles are everlasting, their results irrefutable, and his followers consistently exceptional. It’s called “The Superinvestors of Graham-and-Doddsville”.
Regarding why Value investing continues to give exceptional returns, he wrote:
“the secret has been out for 50 years, ever since Ben Graham and Dave Dodd wrote Security Analysis, yet I have seen no trend toward value investing in the 35 years that I’ve practiced it. There seems to be some perverse human characteristic that likes to make easy things difficult.”
Value investors – though numerous – still remain a small minority in comparison to (those who Graham called) speculators.
Buffett also wrote of Graham’s “superinvestor” students that:
“These are men who select securities based on discrepancies between price and value, but they make their selections very differently.”
Perhaps that analogy can be extended beyond Graham’s students to all value investors.
For example:
Graham said “Confronted with a like challenge to distill the secret of sound investment into three words, we venture the motto – Margin of Safety.”
Seth Klarman says “Loss avoidance must be the cornerstone of your investment philosophy.”
Essentially, Klarman is saying the same thing Graham did half a century ago.
But most of what Graham actually taught has been forgotten today, and things he warned against are often attributed to him instead.
Even when Graham’s recommended methods are used, they are modified – often beyond recognition – to fit the stocks, rather than having stocks clear them.
Graham actually specified a very precise and detailed investment framework, with 17 qualitative and quantitative rules for stock selection.
Serenity Stocks lets you assess 5000+ NYSE and NASDAQ stocks against all 17 rules; with no alterations other than adjustments for inflation.