Outlook For Active Investors Amid Tepid Economic Growth by Charlie Dreifus, The Royce Funds
With worldwide economic progress tepid, interest rates low, and inflation tame, Portfolio Manager Charlie Dreifus discusses what might come next for active investors and the outlook for his small-cap fund.
See the video here.
Outlook for Special Equity
There are a lot of challenges facing the market. I feel the market, overall, is fairly priced. It’s not bargain basement.
It’s hard to argue, I think, for multiple expansion when interest rates and inflation ultimately have to rise. They’re at such low levels that direction has to be upward and if it’s downward it’s probably not a good thing.
So the opportunity for P/E expansion, I think, is somewhat limited. We can have a little more – the prop to the market is the lack of alternatives – the fact that rates are so suppressed keeps the market where it is.
Now, to the extent economic progress worldwide continues to be tepid, there’s room for rates to decline further and so that prop will continue for a while. It is an attractive investment concept, you know, the notion of buying solid dividend payers with increasing distributions and therefore higher yields in an environment of financial suppression, with rates being forced down by central bankers, is attractive but it doesn’t allow for P/E so, ultimately, earnings have to improve.
We’ve had I think now 22 consecutive quarters where earnings have advanced for the S&P greater than revenues. I am a big believer in lean and mean, and the ability of incremental margins but this is getting long in the tooth.
At some point, to get earnings gains, the economy has to get better. And my guess is that we’re going to need fiscal in addition – what’s been lacking in terms of getting world economies going, in my opinion, is the absence of fiscal stimulus.
We have gotten a lot of monetary stimulus. So I think it is going to be reasonably hard for the market to have any kind of impressive gains.
I think what active investors, such as we here at Royce and Special Equity perhaps specifically– I know I feel more than ever – I feel that my small-cap portfolio is basically an event waiting to happen.
The valuations are so attractive and the characteristics of the company are so attractive that something in terms of a transactional event or the market really recognizing the attractiveness of the companies is prone to happen.
The way of getting any significant return, I think, is going to be through stock selection and the market overall is not going to provide it, in my opinion, and it’s going to be partially through some kind of transactional event.