Over the past couple of years, value and recovery managers have continued to be blindsided by external events.
This year looks like another unpredictable year, with new Covid lockdowns in China, interest rate rises and the war in Ukraine causing a spike in geopolitical risk, economic uncertainty and inflation.
In many ways, global economies are moving into a period of significant public and private investment. There is a need to spend more on defence and to support more sustainable energy, while not forgetting the need to invest in the existing energy supply (and ensuring it is as secure as possible).
There is also a need to provide a greater balance between on-shore and off-shore supply chains, and invest in the capital-intensive industries that have seen under-investment over the past few years and are as a result unable to cope with recent demand.
The next 10 years is, on many levels, going to be different from the post-global financial crisis years, and stock markets are currently struggling to understand exactly how this will play out.
Despite such uncertainty, value and recovery stocks continue to demonstrate opportunities for the investment industry. The aforementioned geopolitical and market events have encouraged the flight of capital back to relatively safer markets, like the US.
But in my view, it’s so much easier to find standout valuations in the rest of the world. My team continues to hunt for new ideas and investments in the US, but we are, and will remain, genuine global investors.
We are seeing so many stocks where the valuation is ridiculously low. There are so many examples of stocks trading on distressed levels all around the world. Yes, we need to be cautious of bubbles in certain parts of the investment universe – as well as a lot of expensive assets following a bull market for a period of time – but there are some really attractive valuations out there right now.
Looking at the market as a whole, the chart below shows the differential between value and growth stocks. I see this as a once-in-a-career opportunity to invest in great stocks, at very low valuations.
Take banks for example, which were popular for the first time in 10 years at the beginning of this year but are now back to being hated.
They were doing well when they were seen as hedges on higher interest rates, then they promptly collapsed as they were seen to be exposed to economic and geopolitical concerns.
They are, on average, trading at big discounts and have strong balance sheets, despite the cost of living crisis. We think they are positively geared for an upward trajectory. They are also very resilient in the context of an economic downturn. Banks are as cheap a hedge on interest rates as you can find.