Firms sullied by the economic situation
It is irrational for a large number of truly global companies to be tarred with the same brush as their country of listing
The real, if often forgotten, reason for the existence of equity markets is to efficiently allocate (scarce) capital between competing businesses, based on investors’ assessment of current fundamentals and future potential for growth.
With all of the noise created by the financial services industry this is easy to forget, but during our summer breaks perhaps we should take advantage of time for reflection to remind ourselves of what equity investing is really about.
In contrast to the above, the proverbial alien observing equity markets at the moment would conclude that they are driven primarily by the actions of governments, government institutions (for example, the Federal Reserve, the Bank of England), and supra-governmental institutions (for example, the European Union, the European Central Bank, the International Monetary Fund). It has, in fact, become difficult to explain equity market moves (in aggregate, at least) by the real reason behind the existence of equity markets. Since when is the future value of a group of companies determined by whether or not a central bank implements further quantitative easing, or whether other supposed growth-supporting measures are implemented by the government?
For sure these factors matter in determining future growth prospects for the economy, and by association for the companies that operate in them. But a large number of such companies are truly global in nature, yet get sullied by the economic situation in their country of listing – this is irrational. And while any potential break up of the eurozone would have very substantial implications for both global economic growth and corporate profits, the apparent fixation with this macro-economic risk, seemingly at the expense of any consideration of company fundamentals, does again seem irrational. Secondarily, but importantly we need to ask whether in the obsession with macro-economic worst-case scenarios, the valuations of both individual stocks and entire markets have become depressed to below Armageddon levels of valuations – one where the only way, when rationality returns, is up.
Let us think about Standard Chartered. I do not know whether or not the bank has acted inappropriately, and this is not relevant here. What I do know is that there have been for some time two types of fund managers who have owned Standard Chartered – first, those who felt that based on detailed fundamental analysis, including its growth potential in Asia, it was an attractive stock. Conversely there were those fund managers who bought it as an ‘anything but Lloyds/RBS/Barclays’ play to maintain some banking exposure in UK stocks despite disliking UK banks. It is this latter category that deserve criticism – why own something because it is the lesser of the available evils? There are too many fund managers who have found themselves in this position. In other words, driven by fear (of macro-economic problems), managers are forced into areas they might not necessarily have a valid investment thesis for, but instead own as a perceived safe haven that has, at least in the past few days, proven anything but. Why am I convinced this has happened? Simply because managers seemingly indiscriminate of style or approach have, in the post-2008 environment, attempted to justify their ownership of Standard Chartered. For some, perhaps a majority, this stock did fit their investment philosophy, but for some it did not.