Putnam US Value Equity
Mandate commentary
Q2 2024
Highlights
① The portfolio outperformed in a positive environment for U.S. equities, although value stocks declined during the quarter. Stock selection was the main driver of relative performance.
② U.S. equities driven by technology and telecoms sectors.
③ Consumer spending has plateaued, and economic growth has normalized.
Mandate overview
U.S. stocks delivered gains in the second quarter. The quarter began on a weaker note with stocks declining in April. Concerns about rising inflation and potential aggressive sentiment from the U.S. Federal Reserve (the Fed) weighed on investor sentiment and index returns. Markets rebounded in May and June, with renewed investor optimism about the economy supporting most equities. On the macroeconomic front, inflation data came in lower than expected. After a string of hotter U.S. inflation readings for the first three months of the year, this reading was welcome news for markets. The Fed’s updated set of estimates pointed to one rate cut in 2024, down from the three cuts forecast at its March meeting.
In this environment, the portfolio outperformed its benchmark. Stock selection led the outperformance. Neither cash nor sector allocation decisions had a significant impact.
Strength in stock selection was led by positions in the information technology, health care, consumer staples and financials sectors. Weakness among selections in the energy and industrials sectors provided a modest offset.
Mandate: US Large Cap Value Concentrated SMA
Performance contributors
NRG Energy – The overweight position was a top contributor. The stock continued its strength amidst fundamental improvements and developing opportunities for electricity producers.
Oracle – An overweight position had a positive impact due to positive momentum from the company’s artificial intelligence (AI) computing platform, driven by increased partnerships.
Performance detractors
United Rentals – An overweight position was the top detractor. Shares underperformed alongside concerns over soft macroeconomic data.
ConocoPhillips – An overweight position detracted. Concerns over near-term commodity prices weighed on shares.
Total gross returns:
Total return |
QTD |
YTD |
1YR |
3YR |
5YR |
since INC. (NOV. 14, 2016) |
PUTNAM US VALUE EQUITY |
1.85% |
15.87% |
26.30% |
13.94% |
15.62% |
14.94% |
Mandate repositioning
Economic activity in the U.S. has been surprisingly resilient. However, economic data — particularly as it relates to consumers — has begun to soften. This should be expected given the Fed’s ongoing restrictive policy stance. The consensus is for strong earnings growth for 2024, but this may be vulnerable to a reset if economic activity slows relative to expectations. However, the portfolio management team is finding opportunities in areas that have been left behind, such as consumer staples-oriented companies, whose steady growth is not appreciated in this market. The portfolio management team continues to expect volatility related to the U.S. presidential election as well as other major elections across global markets.
By sector, the portfolio remains within +/-5% of benchmark weight. Currently, the largest overweight positions by sector are in consumer discretionary and consumer staples. While the financials sector is the largest position weight in the portfolio, it is one of the largest relative underweight positions. The communication services, real estate and industrials sectors also maintain their positions below benchmark weight.
Market overview: AI pushed equity growth while central banks started to pivot
The second quarter continued to be dominated by the growing influence of artificial intelligence, with investors focused on opportunities in AI-enabled businesses and hardware. Additionally, there was a notable shift in monetary policy as some central banks adjusted their interest-rate policies as inflation risks receded.
In Canada, year-over-year inflation dropped to 2.9%, while in the U.S. it fell to 3.3%. Both indicators are trending downward and remain range bound. The Bank of Canada was the first among central banks in the G7 to cut its overnight lending rate, which we view not as a divergence in monetary policy, but rather as a precursor to the U.S. Federal Reserve eventually following suit. The European Union also cut rates modestly, while the Bank of England held rates as-is, for now. In our view, Canada and Europe have an increased risk of an economic slowdown, while U.S. and emerging market (EM) economic conditions appear to be improving. Canadian and international equities may be weighed down by slower economic growth and potentially weaker earnings growth, with limited valuation upside
Market outlook: global economic conditions remain favourable
We believe interest rates at central banks have peaked, with Canada and the European Union lowering rates ahead of the U.S. Federal Reserve. The economic outlook shows signs of levelling out compared to three months ago, as unemployment ticked higher and consumer spending plateaued. The summer months may bring heightened headline risk surrounding the U.S. presidential election, but seasonality and historical data suggest equity markets are typically positive heading into the fall.
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