We are seeing a flight to quality. These are the words of Senior Portfolio Manager, Sam Debio, of Artio Global Investors during the CFA-sponsored lunch-in at the Milwaukee Athletic Club on September 28. Mr. Debio has been with the firm since 2006 and manages a small cap core equity portfolio with the ability to tilt the fund’s investment style towards growth or value stocks based on market conditions and fundamental bottom-up analysis. With ever increasing macroeconomic concerns, the portfolio manager is seeing “short term volatility”. But as a long term investor, Mr. Debio sees potential upside to current valuations over the next 3-5 years.
One of the key components of Debio’s presentation revolved around economic trends and the future outlook of domestic equities. He states “corporate earnings are growing, but stock prices are declining”, which begs the question, why? The market is telling us that valuations are going lower and there is poor appetite for riskier assets as investors are moving into safe havens. There has been a trend over the past 6-8 months of money being pulled out of micro, small, mid and large cap stocks, respectively, as this asset allocation shift plays out. This is the natural process of investors curbing their risk appetites. However, he feels that stocks are starting to look cheap at current levels as media coverage has created a negative feedback loop and spooked investors. Negative sentiment has overwhelmed the markets.
The next portion of Debio’s presentation focused on the Fed and inflation. He talked about how the Fed may want higher inflation because nominal debts are repaid with cheaper dollars. Additionally, nominal wages and tax revenue should rise as a result, leading to increased sales growth for corporations. This would lead to a positive wealth effect which should be good for stocks in future quarters. As this scenario may play out, investors should start to diversify and not try to time the market as it is very difficult to make market timing bets.
In the short term Debio expects additional market volatility. However, this could present attractive entry points for investors with longer term horizons.
