Francis Gannon: Is the Market in a Tug-of-War?
article , video 05-18-2018

Francis Gannon: Is the Market in a Tug-of-War?

Francis looks at the opportunities in increased volatility and how certain small-cap cyclicals look primed to benefit from a growing economy.

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Is increased volatility helpful for active managers?

The easy answer to that is, yes, increased volatility is a positive for active managers. Volatility should be thought of from our perspective as opportunity. And in a world where we’re seeing increased or more normal environment from a volatility perspective, that means better opportunities for active managers. It also means that the opportunity is no longer in the index, but the opportunity is in the individual stocks within that index.

We seem to be in a tug-of-war between what has worked in the past, and what I mean by that—think growth companies, think non-earners in general. And those other companies now would be the ones that are benefiting from better economic growth domestically and internationally that actually have earnings and cash flow.

So the market is at a moment of conflict, which is creating volatility, which from our standpoint is creating a lot of opportunity.

We seem to be in a tug-of-war between what has worked in the past—growth companies… And those other companies that are benefiting from better economic growth domestically and internationally that actually have earnings and cash flow.

Why do you find cyclicals attractive?

I think one of the consistent factors here has got to be the economy. So we’ve had an economy that's improving, but you've also had investors who are nervous about the economy. We were in a long period of anemic economic growth, and we’re just starting to break out of that. And there needs almost to be confirmation that that continues.

You know, many of these businesses remain in great shape from a balance sheet perspective. Many of these businesses remain in great shape from an underlying cost perspective. So if that topline can grow, if the economy can pick up and you can see topline start to expand, that’ll fall quite quickly down to the bottom line.

The opportunity set, it's within companies that actually have real earnings, that valuation is cheaper than the other side of the market.

What should investors be focusing on?

I think investors should be focusing on the underlying strength of the economy. We’ve talked an awful lot about return to normalization. The rules of finance can be suspended for so long, but you have to have underlying fundamentals in earnings and cash flow. And these businesses have all those things that the market is not giving them credit for.

Important Disclosure Information

The thoughts and opinions expressed in the video are solely those of the persons speaking as of April 9, 2018 and may differ from those of other Royce investment professionals, or the firm as a whole. There can be no assurance with regard to future market movements.

The performance data and trends outlined in this presentation are presented for illustrative purposes only. Past performance is no guarantee of future results. Historical market trends are not necessarily indicative of future market movements.

This material is not authorized for distribution unless preceded or accompanied by a current prospectus. Please read the prospectus carefully before investing or sending money. Smaller-cap stocks may involve considerably more risk than larger-cap stocks. (Please see "Primary Risks for Fund Investors" in the prospectus.)

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