Generally, the pace of economic growth has little to do with stock market returns.
Even in slow economies, firms that improve their returns on capital may benefit investors.
Value Team Leader
As we enjoy the beautiful fall days around the country and take in that American tradition of the tailgate, I naturally find myself ruminating on the character of economic growth (what do you do?). The best tailgates I’ve ever attended (most at the University of Wisconsin in Madison) always started early and ran late. The sustainability of the event was the hallmark, and at the heart of the best events was the slow-roasted pig. . .the economic corollary of which is the slow, steady growth we find ourselves enjoying today. However, economic commentators of all stripes consistently line up to publish articles lamenting the slow pace of our current economic expansion. My guess is that most of these commentators would be the type of grillmeister that would tend to burn the hot dogs.
No Need for a High Flying Economy
Economic growth is an important fuel that allows equity markets to grow, but the pace of economic growth has very little to do with returns in the equity market. In contrast, confidence about the sustainability of growth will be a meaningful contributor to the future outperformance of stocks over bonds, in my opinion. Risk premiums – or the amount of extra return you need from the stock market to entice you to invest – are still fairly high relative to history. What drives this view of risk lower (and stocks higher)? It’s exactly what we’re now seeing, an appreciation for slow roasting (i.e. sustainability). Our view of the drivers of economic growth all point to a slow, steady improvement, with no real growth fireworks. This steady-as-she-goes view is critical to our opinion that now is still a good time to add investments to U.S. stocks (and perhaps Europe and/or Japan).
Focus on Firms
The above viewpoint is about as far as we go with allowing GDP growth to influence our investment decisions. Really, the core of what we do is to look at the ability of companies to do more with less – in other words to earn more profits with incrementally fewer resources. This improvement in returns on invested capital (ROIC) is the foundation for shareholder value creation in our opinion. Today, we’re seeing it in many forms. We believe a couple of our most compelling investments are Suncor Energy and NCR Corp. In the case of Canadian oil firm Suncor Energy, this improvement in ROIC is coming in the form of more efficient use of existing assets. While in the case of NCR, a business technology firm best known for making ATMs and similar self-service kiosks, we believe that recent investments (including acquisitions) are positioning the company to earn higher profits with more consistency as they broaden their markets, and increase the annuity nature of their income.
We’re bullish because of opportunities like these. Our uncommon appreciation for “slow roasting” combined with availability of stock-specific investments that are effectively navigating a world where growth is not delivered on a platter is our recipe for the future. Bon Appetit!
As of September 30, 2013, Oppenheimer Large Cap Value Fund had a 2.50% position in Suncor and a 0.71% position in NCR; Oppenheimer Small- and Mid- Cap Value Fund had a 2.84% position in NCR; and Oppenheimer Select Value Fund had a 2.33% position Suncor.