All three of the panelists argued that global growth creates a more compelling story across asset classes, especially as the U.S. bull market in equities continues to age.
“The ride isn’t over yet, but we’re getting closer,” said Léger. “We’re eight to nine years into the expansion and the bull run in U.S. stocks, we’ve enjoyed some pretty fantastic gains in U.S. equities off the 2009 lows… but the byproduct of all this is that valuations have become stretched.”
Léger noted that this is the second longest bull market in U.S. history. It’s not that the market is hostile to domestic stocks, but that the environment is less friendly than it had once been, according to Léger.
Oppenheimer is encouraging investors to look for opportunities in overseas markets.
“Until months ago, they did not participate on the upside, and so their valuations are compressed,” said Léger. “we find compelling value in regions like emerging markets and Europe.”
Global market momentum is not just driven by growth, but by continued accommodative monetary policies. Though central bankers in Europe, the U.S. and the United Kingdom have indicated that they will gradually tighten monetary policy and shrink their balance sheets; as a whole interest rates and quantitative easing should continue to support equity valuations, said Léger.
Thomas looked at the markets through a factor prism, taking into consideration six academically supported, persistent, statistically robust and investable factors: market beta, size/market capitalization, value, momentum, quality/profitability and volatility/beta sensitivity.
“Factor performance was mixed in 2017 -- in some years, all factors work in concert, in other years no factor performs particularly well, but rarely to you see a year where every factor is out of favor,” said Thomas. “The top performer was momentum -- there was a low volatility environment where stocks posted strong gains with minimal drawdown, and stocks that won in the past continued to well.”
Quality stocks from profitable companies also outperformed in 2017, while small-cap and value stocks underperformed their larger-cap, higher-valuation counterparts, said Thomas.
The outlook for factor performance this year largely depends on an investor’s outlook on equity and fixed income markets in general, said Thomas.
“If stocks will march higher, perhaps momentum and quality would continue to perform well, but if volatility increases, low volatility and quality could be expected to perform better,” said Thomas. “Value should also do well when the market becomes more volatile.”