Cyclical stocks leading market recovery: Portfolio Manager
Causeway International Value Fund Portfolio Manager Sarah Ketterer joins Yahoo Finance’s On The Move panel to discuss the outlook for markets as the major indexes claw back from Thursday's selloff.
Video Transcript
ADAM SHAPIRO: We're going to keep this discussion going. Not only are institutional investors might having a difficult time but retail investors trying to figure this out as well. So to help all of us understand what's happening, let's invite into the program Sarah Ketterer. She is the Causeway International Value Fund Portfolio Manager. Good to have you here.
SARAH KETTERER: Thank you.
ADAM SHAPIRO: So let me ask you a question because we heard Jared talk about cyclicals, and you have said cyclical stocks have led prior market recoveries. This one is no exception. When we're talking about cyclicals, I mean, simply put-- correct me when I get it wrong-- we're talking about stocks that tend to do well when markets are booming and tend to fall when markets are not. If that's accurate, as an investor in this market, how do you determine that?
SARAH KETTERER: Yeah, think about a cyclical stock as economically sensitive, and right now we are in recession. So clearly cyclical stocks should be under a lot of pressure, but markets anticipate recovery long before we see it in economic data.
And the cyclical stocks got hit the hardest. You made reference to software. It kind of has sailed through-- many of those stocks have sailed through this COVID crisis unscathed, and some of them are even higher than they were before they went in. The cyclicals, however, whether they're in any type of economically sensitive business-- I think banking is a great example. It's extremely sensitive.
Those stocks, many of them halved or worse in the-- down to the bottom of markets in late March, but many of them-- not all, but many of them have had very significant recoveries. But they've only just started, and that's really the message.
In the last several crises, the consumer discretionary-- the materials, the industrials, the financials, they all led the markets on the way up.
ADAM SHAPIRO: So when we look at what's happening, we want to point out-- Jared just sent us a note that the S&P 500 briefly went negative since we came on to the stream. When you're looking at this market, all of this makes sense, and we look at the past as at least a guide to what could possibly happen. But this moment in time, this pandemic is so unique to any of us in our lifetime experience. It's not a financial collapse. It's different in so many ways. It seems to me as if caution should have kept us from having the rally we experienced over the past couple of weeks.
SARAH KETTERER: Well, I wouldn't underestimate the other unprecedented event, and that's the massive amount of global monetary stimulus and fiscal stimulus. The fiscal is extraordinary in itself, the kinds of spending that governments around the world are doing to ensure there isn't a collapse in employment and wages but amplified by what's happening in monetary policy, and you see that in markets.
And it's interesting, back to the cyclicals. Not only are they leading out of the bottom of the market-- so in the last couple of months, they are generally doing better across the globe in all markets. But the more economically sensitive, the better, and we think that's a response to what the Fed is doing and what the bank-- the European Central Bank is doing, the Bank of Japan, et cetera. So that stimulus is really important to bring about the kind of recovery in economies that the cyclicals respond to.
AKIKO FUJITA: Sarah, how should we be looking at the retail play right now? There's been so much talk about these stocks-- you know, the airline stocks even, the bankruptcy plays like a Hertz, how they could have pushed higher--
SARAH KETTERER: Yeah.
AKIKO FUJITA: --you know, during the recent rally. And I'm wondering if the retail play is being exaggerated, or is that actually a thing right now that's really changing the dynamic in the market?
SARAH KETTERER: My colleagues and I would-- we are cautious about heavily financially geared or leveraged companies because they do-- they're extremely, extremely volatile. You can get plenty of action in the market in terms of torque on the way up in the cyclical area in sort of the more stable part of retail embedded within consumer discretionary. You don't necessarily need to own companies that are on the cusp of bankruptcy. In fact, we would argue against that.
But there are lots of other interesting areas in discretionary like automotive. It's going to come out of this in a much more consolidated fashion. And all these companies-- this is the really important point about the cyclical stocks. Managements are not just sitting around. They've been in a huge hurry to strengthen their balance sheets, add liquidity, become more solvent institutions so they can weather the storm, even those that are in areas-- you mentioned the travel-and-leisure area, almost the hardest hit. They've had to raise the greatest amount of money, but they're well set for recovery.
AKIKO FUJITA: But, Sarah, in terms of the retail investors-- sorry, I should have clarified, the retail investors, how much they have pushed the market higher when you look particularly at some of these stocks like the airline stocks or like a Hertz.
SARAH KETTERER: Well, the airlines have only just started. And whether it's a retail investor or it's institutional investors or just the wall of money that's managed quantitatively and algorithmically, all the money that's gone in today doesn't even begin to represent, in our opinion, what will happen once these companies are actually generating profits again. In fact, they just need to generate revenues again. The ships need to be sailing again, the cruise ships, the airlines with their fleets back in-- at least largely fully deployed. We're a long way from that.
So I think you can expect much better earnings in the future from these stocks. And if it attracts more retail investors, all the better.
ADAM SHAPIRO: When you say much better earnings in the future from these stocks, how much further? I mean, for instance, let's talk about American Airlines. I mentioned them in the headline. Their cash burn is down to $40 million a day. They hope by the end it's going to be zero. But from an earnings standpoint, that's not a really good picture. We're looking at two, three years out, aren't we?
SARAH KETTERER: Yeah. Well, they-- I put them in the more leveraged category. You have to be somewhat careful with those stocks.
I don't think any nation globally is going to let its major sources of transportation, airlines, slip through an abyss, and so we see a lot of subsidies. And the airlines, as long as the shareholder or the investor is not diluted so significantly that the upside is really muted, they can be very good stocks as well. There are just some very well-managed airlines globally that are irresistible as the markets sell them off.
ADAM SHAPIRO: Sarah, we appreciate your being here. And I just want to point out before I thank you for joining us that a little bit later on Brian Cheung's going to talk to us about some of the risks less experienced investors on the retail side might be experiencing as they look at stocks that are seeking bankruptcy protection, and those investors may actually wind up getting burned.
But right now we have to say thank you, Sarah Ketterer, Causeway International Value Fund portfolio manager. All the best to you.
