Markets are offering up some major value plays. Here’s how to take advantage.

It may be time for a rebalancing of your asset mix

There is a lot of concern about the forward outlook for equity markets simply based on this year’s strong performance against a backdrop of contracting global economic growth and the ongoing trade dispute between the U. S. and China.

However, all one has to do is extend their time horizon past last year’s correction in order to identify potential value opportunities that currently exist in today’s environment. While we are proponents of having a well- diversified international portfolio, Canadian investors may be tempted to herd into those segments of the market that have delivered strong levels of performance such as the techheavy U.S. equity market.

In this regard, we believe that it may be worth at least reviewing the overall situation within the S&P/TSX, developed markets outside of North America, and higher growth economies including emerging markets when it comes to asset allocation decisions and rebalancing.

Canadian Equities

There is a lot of talk about the S& P/ TSX Composite Index rallying nearly 17 per cent this year, however when backing things up Canadian equity markets are up a paltry two per cent since the beginning of January 2018 compared to the 11.5- per- cent gain by the S&P 500 over the same period. Unfortunately, it doesn’t get better with a two-per-cent annual return over the past five years and an 11-per-cent total gain from its May 2008 pre- financial crisis highs compared to 114 per cent for U. S. equities.

This is very likely due to our high weighting to energy stocks. Despite this week’s rally on the Saudi attack, WTI oil prices are still down approximately eight per cent from the beginning of 2018. However, it’s a different story for oil stocks with the Capped Energy Index getting pounded this year selling off nearly 22 per cent over the same period.

Financials and lifecos, which are the largest component of the S& P/ TSX have gained 15.5 per cent this year but are only back to where they started two years ago. Interestingly, all of this is reflected in the S&P/TSX having a dividend yield of approximately 3.25 per cent versus 1.87 per cent for the S& P 500 — something that could be appealing to yield- hungry investors in today’s low interest rate environment.

European Markets

It actually gets much worse when looking at developed markets outside of North America. The MSCI EAFE index is still 24- per- cent below its October 2007 highs whereas the S& P 500 has nearly doubled. From a valuation standpoint, according to Bofa Merrill Lynch, U. S. equities are trading at 70- year highs versus European equities, nearly a three-standard-deviation event.

Clearly participants are factoring in Brexit risks and a struggling European banking system but one has to wonder how much more downside there is from current levels. Looking ahead, one would hope the European Central Bank is aware of the current situation and will offer the appropriate support should conditions deteriorate.

Emerging Markets

There is a pervasive fear of an escalation of the trade war and its impact on emerging markets which are dependent on exports to fuel higher levels of economic growth. This makes some sense as in July, China posted its slowest level of growth in 27 years.

Not surprisingly, emerging markets as represented by the MSCI Emerging Markets index have been an underperformer as the index is still down nearly 10 per cent from the beginning of 2018 and a whopping 25 per cent from its October 2007 highs.

In conclusion, while there are those touting worries over just how expensive the equity market is, it all depends on where you are invested as there are some value opportunities out there for those willing to take a bit of a contrarian position. At a minimum, a regular rebalancing of your asset mix within a globally diversified portfolio is one way to take the guesswork out of it.

value

... for those willing to take a bit of a contrarian

position.

Martin Pelletier, CFA is a Portfolio Manager and OCIO at Trivest Wealth Counsel Ltd, a Calgary- based private client and institutional investment firm specializing in discretionary

risk- managed portfolios as well as investment audit

and oversight services.

Peter J. Thompson / financial Post files Financials and lifecos, which are the largest component of the S&P/TSX, have gained 15.5 per cent this year but are only back to where they started two years ago, Martin Pelletier notes.