Richard Bernstein famously wrote “Attention Venture Capitalists: Leave Silicon Valley for West Texas” – one of the most well-timed research reports ever published – in March 2000 when he was chief U.S. quantitative strategist at Merrill Lynch. Mr. Bernstein appears to be in a similar ‘get out of the most popular technology stocks and buy pretty much anything else’-type mood as founder of his own firm RB Advisors.
Mr. Bernstein believes there are “once-in-a-generation investment opportunities” for 2024 resulting from what he terms as “overly speculative myopia.” Notably, he thinks there’s a misguided focus on the Magnificent 7 megacap stocks: Tesla Inc., Microsoft Corp., Nvidia Corp., Apple Inc., Alphabet, Meta Platforms Inc. and Amazon.com.
Investors have focused on these few stocks at a time when the fundamentals and growth characteristics of the Magnificent 7 are far from unique. The strategy team at RB Advisors screened all G7 markets, including Canada, and found 169 companies with expected earnings growth above 25 per cent. Only three Magnificent 7 stocks made the list.
The current mania surrounding artificial intelligence that is driving technology stocks reminds Mr. Bernstein of the “new economy” language in the late 1990s. The technology sector would reshape the economy eventually, but not before a ‘lost decade’ for technology stocks beginning in 2000. He infers that the next ten years from here will feature similar underperformance of the Magnificent 7.
The 2000-2010 period did not see all asset classes perform poorly, as small cap value and emerging markets stocks more than doubled. RB Advisors believes U.S. small caps and emerging markets stocks will again outperform in the next decade, along with U.S. economically sensitive stocks and industrials.
The full investment thesis for each of these sectors is available in the full RB Advisors report here. For my part, I have a lot of time for Mr. Bernstein’s research but don’t currently have the risk tolerance for the added volatility of U.S. small caps. Besides, the Russell 2000 has underperformed the S&P 500 by almost a factor of five over the past three years.
That said, it is often the case that the best performing investment ideas for the future are those that are most neglected, and look the riskiest in the short term.
— Scott Barlow, Globe and Mail market strategist
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Ask Globe Investor
Question: I am retired with a large cash cushion in ISA (individual savings account), GICs, and high interest savings accounts – enough to last us five years. The rest of our assets are 100 per cent equities, and we earn a decent dividend income from these, not to mention capital appreciation as we are long-term holders and not prone to sell in a downturn.
My question: Our for-fee advisor (who does not manage our portfolio) wants us to shift from mostly U.S. and Canadian stocks to 45 per cent international and emerging market stocks. We are not comfortable with that. Our current exposure is around 10 per cent and seems more than sufficient.
We are not seeking stellar, swing for the fences returns – just steady eddy returns. Our portfolio has done that.
The U.S. market has done much better on a compounded after inflation basis than EAFE or EM, so why shift to those markets for one of their possibly brief outperformance periods over the S&P 500 only to revert soon thereafter to returns that lag the TSX or S&P 500? Many thanks. – Peter H.
Answer: You answered your own question when you wrote: “We are not comfortable with that.” I would never advise anyone to do something they weren’t comfortable with, even if I thought it was a world-beating strategy. Being able to sleep well at night far outweighs the few extra dollars you might earn.
That said, your advisor isn’t talking complete nonsense when it comes to the markets he recommends. The iShares MSCI EAFE Index ETF (CAD-Hedged), which trades under the symbol XIN, has gained 17.25 per cent this year (as of Dec. 15). The 10-year average annual compound rate of return to Nov. 30 is 6.61 per cent.
The iShares MSCI Emerging Markets Index ETF (XEM-T) is less impressive, with a gain of 5.7 per cent year-to-date. The 10-year average is only 3.55 per cent.
There is speculation that both could do better in 2024. But that’s what it is – speculation.
Meantime, the U.S. market has done better, both short and long term. The iShares Core S&P 500 Index ETF (XSP-T) has gained 23.25 per cent this year and shows a 10-year average annual compound rate of return of 10.45 per cent to Nov. 30,
Canada hasn’t fared as well. The iShares Core S&P/TSX Capped Composite Index ETF (XIC-T) is ahead 10.55 per cent this year and has gained 7.39 per cent on average over the last decade. But it has done better than EAFE over the long haul.
You currently have 10 per cent exposure to international stocks. If you are comfortable moving 5 per cent of your Canadian holdings over to EAFE, your asset allocation would be better. But if even a small move like that makes you nervous, stay where you are.
–Gordon Pape (Send questions to [email protected] and write Globe Question in the subject line.)
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Compiled by Globe Investor Staff