Mackenzie Growth Team
US equities have performed well to the end of the third quarter. The Russell 2500 TR index returned 11.0% in US Dollars (3.0% in Canadian Dollars). Year to date the market continued to be led by Health Care and Technology, but in the third quarter there was a rebound in the more cyclical sectors.
Outlook & Strategy
What are the key opportunities you see?
- In the US, wages have started rising after several years of remaining flat. We believe this rise may prompt companies to begin taking action to improve productivity with the intention of maintaining profit margins. In seeking to improve productivity, companies may invest in new technology and services that can help them get work done more efficiently. We think several of our companies can assist in this effort.
- We continue to maintain large overweights in the Technology and Health Care sectors in the belief that the secular growth available there will serve us well. We continued to add to our exposure in Consumer sectors, which has been very low.
What are key risks that need to be managed?
- We believe that the US economy, like many others, faces structural challenges in the form of high debt levels and slow growth in the working age population. Across the globe, governments have too much debt to be able to boost growth in a major way. With that macro-economic backdrop, we believe that the world may continue to proceed in a lower growth environment compared to history.
- While we do not attempt to forecast near-term economic growth, monetary policy tightening has begun in several geographies, including the United States. There is some risk that economies could begin to slow as a result.
How are you positioning portfolios in response to this outlook?
- What we aim to do is to know as many great businesses as we can, and learn what they might be worth. When markets offer us attractive share prices for these businesses, we become buyers.
- The market has moved to a favorable outlook for economic growth and thus has boosted the share prices of more cyclical companies. Given our more nuanced view of the U.S. economy, we have focused our attention on owning innovative secular growth businesses. These types of companies offer products and services that make the world better, cheaper, and faster – enabling them to grow at a faster pace than the overall economy. We see this as a more “all weather” approach – our companies can do well in a rising economy, but also perform reasonably well in a difficult economy.
- We focus mainly on free cash flow as a metric for company valuations. This measure has become even more important in recent years, as companies have moved increasingly to present earnings in an “adjusted” fashion, which may obscure reality. In our view, accounting risk has risen and we believe securities regulators are becoming increasingly concerned with these “adjusted” disclosures based on recent guidance.