Q3 Equity Manager Report: The Froth Has Left The Market

Does the stock market still have more to give?

Geopolitical concerns are undeniable. Many equity market valuations appear to be expensive. Despite those truths, our manager research team has found that equity managers are generally bullish.¹ We’ve also seen some managers use the market pullback over the first half of October as a buying opportunity, as they believe that some of the froth has left equity markets. Generally is a key term. There remains a lack of consensus within and across the various geographies in terms of sector and country leadership. In our view, this is likely to lead to bumpy equity markets for the remainder of the year.

At Russell Investments, our distinct relationship with underlying managers allows us to have unique access to insights from specialists across the manager universe. Based on this, we’ve compiled our chief tactical observations from key geographic and equity regions, in alphabetical order, for the third quarter of 2018.

Australian equities

Value stocks provide a compelling opportunity

Manager commentary is consistent with our tactical view that value stocks are the right place to be invested. Value-biased managers are becoming increasingly more optimistic, pointing to value stocks being cheaper than growth stocks by two times historical averages.

However, the market continues to penalize these stocks. The most commonly cited theme from the reporting season was that high price-to-earnings (P/E) stocks became more expensive, with the market being less forgiving of stumbles by lower P/E stocks.

Lots of news, less turnover

Despite reporting season, a change in prime minister and the final hearing of the Banking Royal Commission, portfolio turnover for the average manager during the quarter appeared to be lower than normal. The preferred themes of overweight energy and industrials and underweight banks did not change.

Canadian equities

Cannabis stocks lead the way

Strong outperformance of cannabis-related stocks made healthcare the top performing equities sector in the quarter. However, managers are still largely staying away, given very high valuations and concerns regarding management quality and the moat surrounding individual companies.

Resource sectors hit hard in the quarter

Energy and materials were the two worst performing equities sectors during the quarter, which generally fell in line with the market dynamic in the quarter, which favored more defensive stocks and penalized more cyclical stocks.

However, many managers saw this as a buying opportunity based on improving underlying resource prices and generally positive economic growth results.