Earlier this month, leadership shifted out of large cap companies and into small-cap stocks in Canada and especially in the U.S. The Russell 2000, a U.S. small-cap index, has posted a double-digit gain in the past week alone. Rate cuts expectations by central banks have provided underlying support for small-cap stocks to rally. Add to that, the elevated valuations of some large-cap stocks and healthy gains in the sector, which has some investors cashing in their profits and buying value stocks.
The Bank of Canada was quicker to act than other major developed economies’ central banks and has already begun cutting. I believe we will see the Fed start cutting soon. So that creates an environment where the U.S. dollar weakens at least somewhat relative to other major currencies like the Canadian dollar.
Of course, there’s always the potential that central banks were too late, that they kept rates too aggressively high for too long, but that’s not my base case.We do not, but when I look at Canadian stocks, the MSCI Canada Index, for example, what I’m seeing are stocks that are, for the most part, more attractively valued than U.S. stocks and have far greater cyclical exposure than U.S. stocks. So, I’m optimistic that we’ll see better performance going forward.
I think the bull market has legs. And the reason I think it has legs is because has been rather narrow. Just to expand on your response, can you identify those undervalued areas in the U.S. and global stock markets? So, when I was talking about Chinese equities in particular, I was talking about attractive valuations. But, I’ll be the first one to admit that valuations on their own are not enough. Typically, we need to see catalysts.
What I would say is it’s important to be well diversified and that includes diversification along valuation lines. So pairing exposure to Indian equities with exposure to Indonesia, Singapore, and Vietnam, they do not have as compelling a demographic story as India, but they do have compelling demographic stories and they have relatively modest valuations compared to India.
Certainly cracks are forming in economies but my base case is that central banks will have acted in time and it seems that markets, at least today, are anticipating that and that’s why we’ve seen this small but meaningful rally in the small caps, in the cyclicals. So, you’re advocating more of a barbell strategy where both growth stocks and value stocks can rally?