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By Jeff John - February 20, 2019
I sure was happy to turn the calendar from 2018 to 2019.
There was a lot of volatility last year—the first time in a while that we had seen prolonged bouts of rocky markets. But I actually don’t mind a little market volatility because it gives us a chance to buy attractive companies at lower prices, or add to positions we already have in American Century’s small-cap value strategy.
My issue with 2018 was this: the markets unfairly punished a lot of companies because of macro-economic issues, like the still-unresolved trade war with China. Initially, I thought the threat of such a dispute with our largest trading partner was just posturing. As we know now, rhetoric turned into tariffs pretty quickly.
Click on my latest video to get my take on what we might expect in 2019, and for the three reasons I’m optimistic about small cap value stocks this year.
We're looking forward to 2019. We think there's a great opportunity for small caps to rally once again.
I'd say that the opportunity for out-performance in small-cap value is really three-fold. First off, we've had a very long period of time where growth has materially outperformed value, and we think that the valuation discrepancy between those two styles is widened out to a point where it has to revert back to a mean.
Secondarily, within our own portfolio, we've seen a very substantial draw down in multiple, in multiple contractions over the last couple of months, doesn't really match with the underlying fundamentals. I think for next year the market doesn't need a lot to perform well. I think a modest amount of earnings growth, a modest amount of multiple expansion, and a modest amount of improved capital structure at our company's via cash flow generation should set us up for strong returns in '19.
The fundamentals simply don't match the valuations in many cases, and as we continue to focus on companies that are higher quality, good balance sheet, highly competitive companies managed by very competent management teams. We think those dislocations create opportunities in our small-cap value strategy.
We like banks. Banks are a large component of our overall benchmark They make up about 20 percent of the Russell 2000® value. We've historically been overweight banks. During 2018, we saw banks sell off pretty materially toward the end of the year, both on fears of rate hikes and a flattening yield curve, slowing economy, slowing loan growth. We like the balance sheets, we like the management teams, we like the loan growth and the quality of the credits we own, and we think the banks are really positioned for a great recovery in 2019.
There's obviously the fear that the Fed’s raising too fast and furious without checking the data, if you will. So perhaps a tamped down approach to rising interest rates and the pace of interest rate increases, will perhaps give us a little bit longer cycle here regarding the economy and our ability to grow ahead of the next recession.
I think, along with everyone else, we're worried about the trade and the tariff wars that we're seeing. As many people have talked about, we originally thought that these would be somewhat short-lived in nature and more saber-rattling than anything else, and they've proven to be a little bit more durable than we had first anticipated.
I think a lot of people who looked at these trade and tariff issues early on thought that a lot of small-cap companies might be able to avoid some of the challenges faced by more global competitors who really have exposure to more international markets, such as China. But, we're seeing it flow down to our smaller players in small-cap value space, they're seeing rising input costs and seeing some demand changes as a result of tariffs and trades—so it could be more impactful I think than we had originally anticipated.
I think that 2019 will set up to be another year where we see similar types of volatility that we experienced in 2018. But I do think that it sets up for a nice year for small-cap value investors given the underperformance of value and small during 2018, given the very attractive underlying fundamentals of the companies within that marketplace, and with the underlying growth that we should see in the economy on a go-forward basis.
Trade war aside, Sr. Portfolio Manager Patricia Ribeiro is still finding opportunities to invest in China. Find out how in her latest quarterly update.
It’s too early for value investors to declare victory, but last quarter’s value rebound has Sr. PM Mike Liss optimistic about these opportunities.
Despite a disjointed and volatile economic backdrop, Portfolio Manager Brent Puff remains optimistic on the 2019 outlook for equities. One issue, however, did surprise him in the third quarter of 2018.
October 31, 2018
Looking forward to 2019, we think there’s a great opportunity for small caps to rally again. Sr. Portfolio Manager Jeff John gives three reasons why.
February 20, 2019
There are two topics that much of the investing world is fixated on right now: the multi-pronged trade war and rising U.S. interest rates. In a new blog post, Vice President & Sr. Small Cap Value Portfolio Manager Jeff John shares what it means to his slice of the market.
November 5, 2018
Investment return and principal value of security investments will fluctuate. The value at the time of redemption may be more or less than the original cost. Past performance is no guarantee of future results.
The opinions expressed are those of American Century Investments (or the portfolio manager) and are no guarantee of the future performance of any American Century Investments' portfolio. This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.