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Will growth stocks continue to outperform?
Amber Sinha reveals why markets outside of North America may present potential for investors and what investors should keep an on eye in the coming months.
Will Growth Stocks Continue to Outperform?
[Soft Music]
[Amber Sinha, Senior Portfolio Manager, CIBC Asset Management]
[Amber Sinha speaks straight to camera, with a computer monitor and a bookshelf behind him.]
So, growth has outperformed value for the better part of the current economic cycle. I would attribute that to a few reasons.
[Blue lines shoot from country to country on a computer-generated image of a globe. A close-up of U.S. $100 bills fanned out.]
One being that ever since the global financial crisis, I would say the global economies never came back to the full extent. So, the economies have been growing but subpar. And that environment tends to favour growth stocks because you know growth is hard to find in that environment.
[An aerial shot of Parliament buildings in Ottawa. The exterior of the old Bank of Canada building. Canadian $100 bills being minted in sheets.]
Another reason I would say is that despite the suboptimal GDP growth—we've gotten a lot of support from the government, whether it's fiscal stimulus or monetary stimulus. So, again, this seems to be an economy that's driven increasingly by stimulus, as opposed to the real engines of GDP growth.
[Computer-generated images of gold bars.]
When we have zero rates growth, stocks tend to do better because their cash flows are far out into the future. And if you did use the discount rate for those cash flows, certainly those stocks were more attractive. So that, I would say, is another sign.
[The lights turn on in a big data server room. A skyline view of Silicon Valley. A stock ticker showing results for Great Britain, Switzerland, Canada and Australia. U.S. and Chinese bank notes piled together.]
And last but not least, I think technology has been really powerful, gets more powerful by the day. The technology companies are dominating virtually every stock market index in the U.S., even in China. And again, technology tends to be a growth sector. So, you put all these three things together, pretty strong case for growth over value in the current cycle. The environment going forward, at least in the near-to-midterm, shouldn't be drastically different from the last 10 years. So, in that sense, I wouldn't see a change in growth over value outperformance going forward.
[Soft Music Plays]
[Will U.S. markets climb higher?]
Given the rapid recovery in the U.S. Market, I would say that the better investment opportunities probably lie outside North America, for now.
[Exterior images of the New York Stock Exchange.]
The U.S. Market has had a fairly strong rebound, we are back to the highs from earlier this year. So, we are basically at higher levels than in December of 2019. And you know should just take a pause and think about it. So, December 2019, there was no recession in sight for what was supposed to be a small problem limited to China.
[A doctor holds up a vial filled with blood infected with COVID-19]
The global economy is in a fairly deep recession. We might be past the peak of the pandemic, but we are certainly not all clear. Should the market be where we were in December 2019? So, that's a little bit of a challenge I think in the U.S. Market.
[Exterior of an EU logo sign in front of a building. The Tokyo skyline at night. The Busan skyline at night.]
When you look outside the U.S., I think the recoveries have been more muted. Whereas the situation on the ground with regards to GDP, with regards to the pandemic, certainly looking better outside North America. So, I think in terms of sectors, I would say that are some powerful themes that have been playing out.
[A time-lapse image of factory automation. A close-up of computer code on the screen of a laptop. A cyber security professional looks at data on four computer monitors. A doctor talks to an elderly patient in a hospital room.]
That COVID has only briefly interrupted: automation, or cybersecurity, or an aging demographic, and all the needs that come with that. These trends have not changed from COVID. In fact, some of them have actually been accelerated.
[A time-lapse image of three doctors in full PPE monitoring a patient in a hospital room.]
When we look at stocks in these areas, which have not fully recovered, because of the market action in those markets, that gives us a place to look for new ideas where the fundamentals remain solid, but we get an opportunity to buy them from the volatility in the stock market.
[Soft Music Plays]
[Key investor takeaways]
As investors we have to be mindful of a few things, one being any resurgence in the pandemic.
[A doctor in full PPE monitors a patient in a hospital room. Hospital staff in full PPE spray down a clear curtain.]
At this point, I think the market is getting comfortable with the fact that we are past the peak and a vaccine is just around the corner.
[Syringes circle a vial on a table. A close-up of four clear vials labeled “COVID-19 TRIAL”.]
I think we should have a little more careful stance on that and watch for cases from around the world. I would also say that stock markets have recovered.
[Stock traders watch monitors on a trading room floor. A trader looks at a graph on a tablet.]
So, we need to take a step back and make sure the exuberance of the market is actually reflected in the real economy as well. There may be some disconnect between the stock market and the economy at this moment. And so, I think that's something to watch out for.
[A close up of badges and stickers that say, “VOTE”.]
And I think just as a general comment, we are in an election year, things could get volatile around that. We want to make sure we know all the risks we are taking in our portfolio.
[The American flag flutters in slow motion. A computer-generated image of the Republican and Democratic party logos.]
We are not getting into any stocks that have a binary outcome, depending on whether the Republicans win, or the Democrats win. Last but not least, I would just say that technology gets bigger and bigger with almost every passing week. So, one has to have a more realistic view on the real value of technology stocks, and some of them are undervalued today and some definitely not. So, I think an extra level of due diligence required, at least in the large cap technology space in the U.S. for now.
[Soft Music Plays]
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