Hi, I'm Steve Chiavarone, Portfolio Manager and Equity Strategist at Federated Hermes.
As the economy recovers, where are opportunities for investors?
At Federated Hermes, we made the call late last summer, around the August timeframe, four main calls actually, preference for small cap equities over large caps, for value cyclicals over growth, for international stocks over domestic, and for dividend payers over the broad market. And it was really predicated on the idea that we were transitioning from a recessionary environment to a recovery. And in the recession, you really preferred companies that were less economically sensitive, that were less impacted by the pandemic, and held up better on a relative basis. But now, you want to go more towards offense. You want those companies that were impacted by the pandemic, that are tied to economic growth, so that as economic growth improves, so do those parts of the market. And when you look at each of those four calls, or each of those four preferred parts of the market, you can start to see what the story is. For example, small cap companies tend to benefit from lower rates, which we have, and we think we'll have for a period of time. Cyclical value companies, these are companies that respond very tightly to the economic picture, so as the economy improve, value tends to improve. International, international has more value. If you look at international equity indices, they tend to have more financials and industrials and materials and less information technology. And then finally, on the dividend side, last year was a very difficult year for earnings and cash flows and dividends. But that's over now. You're now back into a period where we expect robust earnings growth in 2021, robust cash flow growth, and the ability for dividends to grow. And in an environment where rates are still likely to be very low, we think that the yield that's offered by those dividend payers is quite compelling. And so, those are the four areas of the equity market that we see a lot of opportunity in 2021 and we expect that those themes will continue, if not accelerate, as we get into the later parts of the year.
Disclosure: There are no guarantees that dividend-paying stocks will continue to pay dividends. In addition, dividend-paying stocks may not experience the same capital appreciation potential as non-dividend-paying stocks. Due to their relatively high valuations, growth stocks are typically more volatile than value stocks. Value stocks may lag growth stocks in performance, particularly in late stages of market advance. International investing involves special risks including currency risk, increased volatility, political risks, and differences in auditing and other financial standards. Small-company stocks may be less liquid and subject to greater price volatility than large-capitalization stocks. Views are as of 2/23/2021 and are subject to change based on market conditions and other factors. These views should not be construed as a recommendation for any specific security or sector. Federated Global Investment Management Corp. 21-30122 (3/21)