Templeton Growth Fund talks up bargain U.S. equity

By Mark Noble | July 31, 2007 | Last updated on July 31, 2007
3 min read

If the Canadian bull market is slowing down, your clients should consider taking their loonies across the border and buying blue-chip U.S. equities at bargain prices. So says Lisa Myers, the high-profile lead manager of Franklin Templeton’s flagship, Templeton Growth Fund.

Myers, who gave a keynote address at Franklin Templeton’s Outlook and Opportunities Forum in Toronto, says there are striking similarities between the current Canadian equities market and the U.S. equity markets prior to the collapse of the dot-com bubble.

“Canadians are in the position of having a strong Canadian dollar and very expensive equities like what we saw in the past with the valuations in the telecom and technology sector, where the U.S. took the lead,” she says.

Looking at a table of where each market’s equity prices sit comparatively, the U.S. market is at decade-low prices, Myers states, while the Canadian market is at all-time record highs.

Those who cashed out at the top of the dot-com boom realized huge returns, but there were also bargains to be made during the collapse of the dot-com boom. Myers says upon the collapse of the tech bubble, the trade weight of the U.S. dollar was similar to that of the current Canadian dollar; those investors who best capitalized on the situation are those who took the high U.S. dollar and purchased relatively cheaper foreign equity.

Canadian investors now sit in a unique position to do the same, Myers emphasizes, and one of the markets they should be looking toward is the currently overlooked U.S. equity market. While it is experiencing decade lows, the performance of its equities, particularly the large-cap ones has been strong. U.S. blue chips have, on average, been generating strong revenues, which, combined with the fact that they are trading below a decade mean price, means there is definite value to be derived.

“As of July 30, 313 stocks, or 53% of the S&P 500 (U.S. large cap index), had announced second-quarter earnings, but the average was still up 9%. If you can track the strong earnings growth with the returns we’ve seen, earnings growth has far outstripped the returns of the sector,” she says. “The market is not rewarding those companies for performing as well as they have been.”

“Part of the reason for this is sub-prime lending, which the U.S. market has become synonymous with. For example, data released Tuesday showed that home foreclosures in the U.S. are up 58%. Myers says the sub-prime fears are legitimate, but she doesn’t personally think that they will affect the long-term prospects of U.S. large caps.

“When you consider that the mortgage market is more than 70% prime loans, those loans are sustaining themselves well,” she says. “With the tightening lending standards that banks have put in place, we should see that remain under control. Can I guarantee you that? No. If we do see significant blowup in the sub-prime markets, it will affect the U.S. market, as well as all the other world markets.”

Myers also points out that for many of the large-cap U.S. stocks she looks at, there is little correlation between credit problems in the housing market, and indeed there is a rapidly decreasing correlation with the U.S. economy in general.

She says a large number of the household U.S. names such as Microsoft, Pfizer or GE are generating a much larger proportion of their revenues from outside the U.S., which has resulted in massive cash reserves — in some cases, tens of billions of dollars’ worth.

“We think that most investors and certainly the market are not focused on the dynamic nature of some of these companies as global players and the percentage of their businesses that are coming from faster growing economies,” she says.

Filed by Mark Noble, Advisor.ca, mark.noble@advisor.rogers.com


Mark Noble