Amid the continued devastation and uncertainty brought on by the coronavirus pandemic, veteran value investor Tony DeSpirito, chief investment officer of fundamental active equity and lead portfolio manager of the BlackRock Equity Dividend Fund, is urging investors to keep an eye trained on a brighter future. That’s especially true for value stocks, which have lagged growth stocks for over a decade and have fallen even harder than the rest of the market so far this year.
“The market is reacting to short-term issues, not long-term problems,” he says. “That’s the difference between now and 2008, when there were a lot of excesses in the financial system. We just don’t have that now.”
As DeSpirito and others in the investment community attempt to quell fears and curb market panic, it’s hard for their intended audience to feel optimistic. Economies around the world are taking a broad hit from containment measures limiting trade and travel. The possibility of a liquidity crunch or deterioration in financial conditions remains very real. A recession is certainly possible, and with interest rates already scraping bottom the remaining running room for rate cuts to stimulate the economy is limited. It’s almost certain that corporate earnings will be hit hard.
On the other hand, he says, the economic and financial backdrop is much stronger and less risky today than it was going into the financial crisis of 2008. And while the ultimate depth and duration of the coronavirus’s economic impact are highly uncertain, he believes the shock is temporary. Assuming the U.S. and other countries are able to rein in the outbreak through decisive containment efforts and limit the economic damage through strong fiscal and monetary policies, the panic will eventually dissipate and economic activity will normalize.
DeSpirito advises investors to step back and remember what the economy has going for it. He points out that before the pandemic the U.S. personal savings rate was above 7% over the past decade. The unemployment rate was near multi-decade lows and lower- and middle-class households were finally enjoying wage growth. Company balance sheets, for the most part, looked sound. For years, low interest rates allowed companies to lock in cheap long-term financing, which helped boost earnings. And while 2020 will see lots of market volatility and moments of panic, the fourth year of a presidential term has historically coincided with positive returns for the S&P 500.
Buying On Weakness
As the market drama plays out, the 51-year-old DeSpirito, who has managed value equity portfolios since 1996 for fund groups such as John Hancock and Vanguard, is taking advantage of depressed prices by gradually deploying the fund’s cash stake into stocks in sectors such as consumer staples, utilities, energy and financials. At the beginning of the year, cash stood at about 9% of assets thanks to end-of-year selling, providing more fodder than usual for selective downturn buying.
As always, he is zeroing in on durable but underappreciated businesses with strong lines of defense such as brand strength, cost positioning strength and robust R&D investments. He also looks for companies with growing dividends, which he says are a signal to the market that a company’s management has confidence in its business.
When a company’s dividend growth is fueled by positive earnings trends and good free cash flow generation, that suggests it has superior, efficient operations. Of the 55 stocks that the BlackRock Equity Dividend Fund held for the full calendar year of 2019, 46 of them grew their dividends during the year, at a median annual increase of 6.1%.