In the new year, the markets have seen a well-documented, near-record selloff for stocks, despite today's mixed returns. However, the broad nature of this “mini-maelstrom of selling” has also exposed opportunities for the astute investor, says Zachary Karabell. Moreover, he said markets (and could have said investors) “have extremely short-term memories.”
In an Envestnet webinar after the market close on Wednesday, Karabell — Head of Global Strategy at Envestnet — plumbed the insights of three market experts to expose where they see opportunities “amid the noise.”
One of those experts, David Polak of Capital Group (which runs American Funds), said in passing that “these are the times when active managers earn their corn,” a British-ism equating to "earn their keep."
While from a macro perspective the markets are certainly “gloomy,” Polak said that from an individual company perspective, the structural changes in the world’s economy “present a lot of risk but also opportunity.” Take China, for instance. Polak said that China is certainly in the midst of a significant transition, moving from a “fixed asset-based economy to one built more on services, which will eventually lead to a more balanced economy.” While some market watchers are concerned about the Chinese government’s ability to control its markets and economy while that transition plays out, Polak is not in that camp. “Chinese officials do have a degree of control,” he said, wondering not so idly “wouldn’t it be interesting if the Chinese government was to cut capital requirements for banks?" Wouldn’t that — or similar unilateral measures — help turn around China’s slowing growth and ease investors’ concerns?
As for oil, Polak said the current price freefall “feels like a supply shock,” which can often lead to economic growth. He admitted, however, that oil is in a “feedback loop” where energy master limited partnerships are “down significantly,” and where signs of an industrial slowdown in U.S. “add to the feedback loop; it’s easy to construct a very bearish narrative.”
Speaking of MLPs, panelist J. Alan Lenahan from, deputy CIO of Fund Evaluation Group, said that “some are rightfully under pressure,” especially drilling MLPs. However, he pointed out that “the majority of MLPs are in the midstream” part of the energy chain. There, dividends have been growing, Lenahan reported, and while there “could be some issues as low oil prices settle in the markets,” energy MLPs are “becoming very attractive.”
Also on market positives, Polak pointed out that American banks have their “strongest capital structure since the 1950s,” and there are signs the Fed will be slow and deliberative in further rate hikes. Moreover, “there are areas of the world’s economy showing growth,” and individual companies benefiting from the global economy’s structural change. Among them are biotechnology firms that are busy commercializing the mapping of the human genome. Polak also sees “opportunities around some well-financed energy companies; it’s hard to see oil prices going much lower.” Yes, getting into energy now may be only for “brave” investors, but growth companies “that did well last year” are also worth a look. “The indiscriminate nature of the selloff,” he concluded, “means there are many opportunities” for investors.
Thomas recited the list of woes of the market: the S&P down 14% from its peak last May, the VIX at 30, value and small-cap stocks “hit particularly hard.” Investors have been demanding "quality in their investments,” so growth has outperformed. However, Thomas said “that may turn this year,” since investors should want exposure to “quality over time,” so value may well “start to outperform.”
Lenahan reported that one “alternative” asset class, real estate, especially in a REIT structure, has had a “fantastic run,” constituting the “strongest performing nontraditional asset class since 2008. But we’re beginning to see some cracks in the REIT market” as valuations of REITs approach their all-time highs while “yields are low.”
On commodities, Lenahan said “we’re nearing the time when commodities are attractive,” but argued that both REITs and MLPs are “well structured, and there will be an opportunity to add them to portfolios before long.”
Answering another webinar attendee’s question on the central banks’ role in the markets, Lenahan said “we're monitoring the Fed’s balance sheet,” which he said has “leveled off; we expect it to decrease.” However, he said “our concern is if we’re entering a period where the Fed will let markets clear without intervention,” there’s plenty of uncertainty on where stock prices will level off, and noted that in Europe, “the [European Central Bank] is underwhelming the market with some of its actions.”
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