A Contrarian View May Be in Order

The seven-year-old bull market that started in the aftermath of the financial crisis could be facing a shift over the next five years, says Validea CEO John Reese in last week’s Globe and Mail.

Reese suggests that such a shift could include a resurgence of emerging markets and trends favoring cyclical, value and small cap stocks over defensive, growth and large cap names. “Investors appear to be betting that economic growth has the potential to come in better than expected in the near term, because cyclical companies are sensitive to economic growth trends.”

“Perhaps,” he says, “investors have grown wary of the glamour stocks and overvalued defensive names, and are ready to return to the ways of Benjamin Graham and Warren Buffet, the value investors who have taught us that good businesses make good investments.” He highlights the fact that value stocks have underperformed growth since the end of 2007 (one of the longest stretches in market history), but argues that the tide is turning.

While investors tend to “overweight” what has happened recently, Reese suggests that “investors who are extrapolating the performance of these trends out into perpetuity and not understanding the long term data, the nature of risk and return, and why valuations matter may be wishing they had taken a more contrarian view when they had the opportunity.”