However, markets hit the pause button on the Trump-driven reflation trade
in March. Flip-flopping on budget conditions and trade policies and two
failed attempts to repeal Obamacare appear to have undermined the market’s
confidence in the administration’s ability to expediently pass bills to
lower taxes and raise infrastructure spending.
Don’t give up on value yet
Value may be lagging, but we still believe the trend can reverse. Why?
The broad equity market is expensive…
The S&P 500 is trading at a forward P/E of 18.61x, vs. the 10-year
(actual) average of ~17x – and growth stocks are even pricier, at 21.67x.2 Against this backdrop, the portfolios of our two U.S.
value-oriented funds – Purpose Tactical Hedged Equity Fund
/PHE.B) and Purpose Enhanced US Equity Fund (PEU/PEU.B) – appear attractively priced, trading at an average forward P/E of 12.99x.2
In addition, the U.S. economy is in good shape, regardless of whether
campaign promises are implemented…
Value may be lagging, but the U.S. is still churning out positive economic
data. This is particularly true on the employment front (the U.S.
unemployment rate fell to
4.3% in May 2017, the lowest jobless rate since 2007).
In addition, the S&P 500 earnings growth for the first quarter of 2017
surprised mostly (75%) to the upside, and cuts to Q2 EPS forecasts were the
smallest recorded in three years. If corporations do eventually benefit from the promised tax cuts, EPS
growth could continue to expand. With profit growth spread relatively
widely, investors will likely opt for less expensive forms of growth.
…But if some of the U.S. administration’s long-stated goals do meet
success, it could be the catalyst for another value run
The early setbacks to the Obamacare repeal and the perceived negative
events shadowing the White House caused markets to retrench. However, the
bill to repeal (and replace) the Dodd-Frank Act appears to be
moving ahead. It passed the House in early June, and is now before the
Senate. Should it pass, it could be a big win for value – particularly
financials. The scale-back includes the elimination of the Volcker Rule and
reductions in capital and liquidity requirements. This is likely to
generate significant additional revenue and free up unproductive capital.
Ideas with Purpose: our value proposition
Over the long term, relative value and quality are two factors that have
tended to historically outperform. Given our favourable outlook, we think
now is the time to re-focus on Purpose’s value solutions:
Purpose Tactical Hedged Equity Fund/ETF
– FX-hedged (PHE)/non-FX-hedged (PHE.B). Conservative investors looking for a risk-managed way to participate
should consider this portfolio of high-quality U.S. value stocks that
tactically hedges market risk based on momentum trends of the S&P 500
Index. A non-FX-hedged version –
– is also available for clients who want exposure to currency returns.
Purpose Enhanced US Equity Fund/ETF
– FX-hedged (PEU)/non-FX-hedged (PEU.B). With its ability to invest up to 130% of its NAV in U.S. value stocks
while maintaining market-level risk,
PEU is an excellent choice for investors looking for an enhanced way to
participate in the U.S. value rally. A non-FX-hedged version –
PEU.B – is also available for clients who want exposure to currency returns.
1. Source: Bloomberg L.P., as at June 30, 2017.
2. Source: Bloomberg L.P.; all data as at June 30, 2017. Value stocks as
measured by the Russell 1000 Value Index (USD); growth stocks as measured
by the Russell 1000 Growth Index (USD).
3. Source: Bloomberg L.P., Purpose Investments, as at June 30, 2017.
is the founder and Chief Executive Officer of Purpose Investments Inc.
which he formed following the sale of Claymore Investments to BlackRock
Inc. in March 2012. Purpose is one of the fastest growing independent
asset managers in Canada, launching its family of investment funds in
the fall of 2013, and now commands over $1 billion in assets under
management, offering traditional funds, absolute return portfolios,
alternative funds, and closed-end funds. © 2017 by Purpose Investments.
Used with permission.
Commissions, trailing commissions, management fees and expenses all may be
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investing. Investment funds are not guaranteed, their values change
frequently and past performance may not be repeated.
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