There are plenty of opportunities in US value stocks, which are set to return to favour having outperformed growth stocks year to date during a volatile time for the US stock market, two US managers say.
In the first few weeks of 2016 the US markets were choppy with the S&P 500 plummeting almost 10 per cent by early February, before the markets staged a recovery.
Adour Sarkissian, manager of the Sanlam Four US Dividend Income fund, says that while value has underperformed over the long term, the end of 2015 could have been the start of a turnaround in the prospects for value stocks, which are outperforming growth stocks by a couple of per cent in the year to date.
He says: “Value has underperformed for a significantly long period of time, but we may have witnessed an inflection point starting at the end of last year. It remains to be seen whether this can be sustained over a longer period of time.”
Sarkissian, who runs a defensive portfolio, says the consumer discretionary space offers a “vast number of undervalued opportunities”.
Ed Cowart, manager of the Nordea 1 North American All Cap fund, says the “momentum trade” that has dominated the markets for the past couple of years has come to an end with overlooked stocks now being picked up.
Cowart says: “For nearly two years, market performance has been dominated by a relative handful of large-capitalisation growth stocks attracting an inordinate share of investor capital. There is accumulating evidence the market is broadening out and allowing many neglected stocks to begin to participate.”
Cowart believes there are five main reasons for this turnaround: an uptrend in economic growth, particularly in the US; fears for China proving unwarranted; the stabilisation of the dollar; the rationalisation of interest rate hikes and the bottoming out of oil prices.
He adds: “Other tailwinds that may sustain a moderately growing domestic economy are low inflation, global monetary easing, a recovering housing market and improving consumer balance sheets.
Over the next few years Cowart says the US economy is likely to see slow but sustainable growth while in the near term the environment should be supportive of the stock market, adding: “All in all, the conditions remain in place for positive equity returns in 2016.”