Value Investing in the US and Beyond

Adam Grossman: That all makes sense. I know you cover the traditional cyclical sectors (Energy, Materials, and Industrials). From a selection standpoint what are you seeing in these sectors?

Dan Zolet: Across these three sectors we expect what I have just said to play out; We expect revenue to be driven by inflation and the reduction of the interest burden to fall. However, our biggest overweight relative to our benchmarks in this space is energy due to some more sector-specific reasons.

First, we estimate break-evens in the US energy patch to be around $60 per barrel. This is below our expected range for oil prices in 2025 (rangebound between $70 and $80), meaning there is room for US energy companies to generate cashflows. These can be passed on to shareholders or reinvested into the business.

One final note is how the incoming presidency will affect the US energy market. We believe that this administration’s emphasis on US oil production could provide more supply to the market. However, we also believe that there will be deregulation in the space. Overall, these two factors should offset when it comes to energy companies’ bottom lines, though we will keep an eye on them.

Adam Grossman: Great stuff, Dan! Kaetlin, as our Financials portfolio manager, you also cover value equities. How does this ‘value rotation’ affect banks? Will larger banks be affected differently than regional banks?

Kaetlin Collins: That’s a good question, Adam! I think the big link to what Dan mentioned and the financial sector is the ‘yield curve’ (the difference in yield between short-term interest rates and longer-term ones). Elaborating on Dan’s comments earlier, we expect the Fed to continue to cut short rates, while longer rates stay relatively more stable. The net effect of that would be a steeper yield curve. This is important because traditional banking generates profits through this differential of short and long rates, with steeper yield curves generally being more profitable for banks.

Your question about large versus small banks is also a really important one, and one I’ve spent a lot of time thinking about. Over the past several quarters, large banks have been able to sustain earnings without a steep yield curve through other income streams, such as trading and mergers & acquisitions advisory (M&A). Small, more regional banks have not had this luxury and have seen their stock prices suffer as a result. Because of this dynamic, it would make sense that the yield curve steepening would provide regional banks with more of a tailwind than larger banks. However, it may take more steepening to unlock the value in small banks, so we expect to be more selective as to when to enter this space.

Dan Zolet: Not to turn the tables on you, but we’ve covered a lot of our thoughts on value in the US…but a large value asset class is international. What are our current thoughts in that space?

Adam Grossman: Ah, well played! So, all things being equal, international markets should also outperform in a ‘value rotation’ market. Of course, like most things in life, all things are not equal here, in our view.

For starters, international economic growth has been weaker, and inflation stickier than in the US. While we aren’t ready to hit the ‘Stagflation’ button yet, things are certainly not rosy abroad. From this weaker position, it seems likely that tariffs will be placed on a lot of international markets by the incoming administration, creating an even weaker position. All that being said, when we do invest internationally, we do prefer more value-oriented segments, such as European banks and Japan.

However, we still prefer to gain most of our value exposure from our US equity selection. As Dan mentioned, we are overweight US energy. Going back to Kaetlin’s comments, in our longer horizon portfolios, we have dedicated positions to small- and mid-cap companies as well.

Thanks for taking the time to chat, Dan and Kaetlin! This was a helpful discussion!

Risk Discussion: All investments in securities, including the strategies discussed above, include a risk of loss of principal (invested amount) and any profits that have not been realized. Markets fluctuate substantially over time, and have experienced increased volatility in recent years due to global and domestic economic events. Performance of any investment is not guaranteed. In a rising interest rate environment, the value of fixed-income securities generally declines. Diversification does not guarantee a profit or protect against a loss. Investments in international and emerging markets securities include exposure to risks such as currency fluctuations, foreign taxes and regulations, and the potential for illiquid markets and political instability. Please see the end of this publication for more disclosures.

By Adam Grossman, CFA, Kaetlin Collins, CFA, and Dan Zolet, CFA

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Index Definitions:

In a rising interest rate environment, the value of fixed-income securities generally declines.

Dividends are not guaranteed and are subject to change or elimination.

Definitions:

Technology and internet-related stocks, especially of smaller, less-seasoned companies, tend to be more volatile than the overall market.

Inflation is a gradual loss of purchasing power, reflected in a broad rise in prices for goods and services over time.

‘Stagflation’ is characterized by slow economic growth and relatively high unemployment — or economic stagnation — which is at the same time accompanied by rising prices (i.e. inflation).

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The yield curve is a line that plots yields (interest rates) of bonds having equal credit quality but differing maturity dates. The slope of the yield curve gives an idea of future interest rate changes and economic activity.

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