After five years of strong equity returns, rising interest rates and rising inflation could put an end to all of that, according to Sean O’Hara, president of Pacer ETFs.
“We’ve gone through five years of really, really nice equity returns, and I don’t think we’re going to see those kinds of returns going forward on an average basis,” O’Hara told NYSE’s Judy Shaw at Exchange: An ETF Experience 2022. “So, a lot of FAs are starting to talk to their clients about making sure that their expectations are in line with where the market is.”
Speaking on “ETF Leaders, Powered by the New York Stock Exchange,” O’Hara noted that “when you see rising rates and rising inflation, historically there tends to be a compression of P/Es,” which is something he thinks “people are really not taking that seriously enough.” So, the Pacer chief has “seen some compression on multiples” and suspects that “there’s probably some more to go.”
“Can earnings continue to grow the way they used to? We’re going to go from 30 year-over-year earnings growth to five to seven. But if it’s not five to seven, and it’s less than that, then I think it could be a very difficult remainder of the year for the equity markets,” he said.
Cash Cows in a Rising Rate, Rising Inflation Environment
Advisors and investors are asking what to with their big growth holdings and where to find investment opportunities in an environment of rising interest rate and growing inflation. Pacer ETFs has seen significant inflows into its Pacer Cash Cows Index ETF Series large-cap value ETFs, which O’Hara said is “perfectly positioned for this kind of an environment.”
“It’s an equity strategy that should do well in a rising rate, rising inflation environment, because we use free cash flow and free cash flow yield as a screening mechanism,” O’Hara said. “The bond market is obliterating people, so they’re looking for alternative ideas there as well, and so we’re having some success in that area as well.”
O’Hara noted that the Pacer US Cash Cows 100 ETF (COWZ) is a good ETF for identifying value in the market. “That fund is up this year, even though the broad market’s down and… large-cap value is down,” he said, adding: “The old traditional price-to-book methodology doesn’t really work because there’s no tangible assets left. Ninety percent of the market value of U.S. stocks is intangible assets.”
Alternatively, O’Hara suggested that financial advisors can find opportunity within the Cash Cows suite of ETFs that invest outside the U.S.: the Pacer Emerging Markets Cash Cows 100 ETF (ECOW), the Pacer Developed Markets International Cash Cows 100 ETF (ICOW), and the Pacer Global Cash Cows Dividend ETF (GCOW).
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