Markets

Which markets are cheap?

Our panel of fund managers pick the sectors and regions around the world where they see value.

05/04/2017

Philip Haddon

Philip Haddon

Head of Investment Communications

If the fund managers we spoke to in our recent article “has the value ship sailed” are right, and the rally in value-style stocks has further to run, then where are the market areas they think are cheap right now?

Japan, Europe and Asia, as well as banks and high yield bonds, are all in their crosshairs.

James Sym, Fund Manager, European Equities:

“There is a lot of talk about Europe being cheap, due to reasons such as the discount caused by various political risks and so on. But when people think of investing in Europe they are looking at the wrong areas; they think of certain big funds that have done fantastically well. These funds are crammed full of those “bond proxies1” – the highly valued growth stocks that have been amazing over the last 10 years.

“So when people are buying Europe that’s what they are buying. I would rather suggest if people are looking at Europe as a cheap region with improving momentum, they should look at investors trying to do something a bit different. The “value” areas of the market are still being overlooked and are not a consensus trade at all.”

Nick Kirrage, Fund Manager, Equity Value:

“We like banks, mainly based on valuation but also on the fact that over the last 10 years things have changed and people haven’t noticed.

“The risks to banks have changed. I can’t think of another sector that has been de-risking every year for the last nine years. A lot of sectors did it for three years then started issuing more debt, more gearing and went back to where they were before, whereas banks are being stress tested every year and getting ever more capital.

“The irony is that banking may be a cyclical sector, sensitive to the ebbs and flows of the economic cycle, but it is one of the best prepared places in the world to defend against whatever may come.

“We spend a lot of time talking about the opportunity set available today, but it might come down to how we act when those choices change. You make all your money in a bear market, you just don’t realise it at the time.”

Marcus Brookes, Head of Multi-Manager:

“We think the value markets are Japan and Europe, both of which we are overweight in our portfolios. Parts of Asia look good value too.

“Europe is one of the last stories that hasn’t played out as much as it should. Brexit and its associated worries are among the reasons Europe has struggled and international investors have not been willing to put their money there. There’s always been reason to go elsewhere, particularly US equities, which are now incredibly expensive in terms of valuation.

“The fundamentals of the US market are looking better than they were, but for us it is just a valuation call. We think the US market may go sideways or devalue, allowing Japan, emerging markets, Europe and Asia to close the valuation gap.

“I don’t think we’re going into a US bear market by any means, but assuming current growth can persist then I can see money moving back out of the US and portfolios being rebalanced.

“Regarding bonds, they continue to offer investors a problem as they tend to be seen as the “safe” part of people’s portfolios. But there is the increased realisation that they may not be safe at all at these levels, so we are using cash instead. But if you are going to invest in bonds then the corporate bond area is the one place where you can still get some value, particularly if the global economy is actually okay.”

Mike Scott, Fund Manager, Fixed Income:

“Clearly in an environment of rising interest rates, duration-sensitive assets (ie bonds) ought to be under pressure. But credit (ie corporate bonds) is one of the last beacons of return from the fixed income asset class, particularly sub-investment grade (higher risk), high yield bonds.”

Matthew Dobbs, Head of Global Small Cap:

“I think Asia is a bit cheap compared to history, but it’s not extreme.

“It’s worth emphasising that I don’t invest in Asia; I invest in a very select bunch of stocks in Asia. As such, I am less obsessed with value than some managers, because I’m quite happy to pay up for a good business model, run by great management.

“I think value investors have to pay attention to disruption and the tectonic shifts taking place in the way people do business. Asia is a very fertile home for disruption, because there are some bright people running some good companies, and a young consumer open to new ways of doing things. For example, many developed markets surveys have shown we’re quite ambivalent about the arrival of self-drive cars. Surveys in China, meanwhile, show they can’t wait for them.

“Asia is maturing, it is coming of age in terms of disruption, technology, research & development, and high value-add manufacturing.

“I don’t have to talk about value versus growth. We don’t have the same dichotomy. We’ve been able to not compromise on quality and still have a lot of cyclicality in our portfolios.”

Please remember that past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested.


1. They are called bond proxies as they are presumed to resemble bonds in terms of their ability to provide low-risk income but with higher yields.

Important information: The views and opinions contained herein are those of the named author(s) on this page, and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds. This document is intended to be for information purposes only and it is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The material is not intended to provide, and should not be relied on for, accounting, legal or tax advice, or investment recommendations. Information herein is believed to be reliable but Schroder Investment Management Ltd (Schroders) does not warrant its completeness or accuracy. The data has been sourced by Schroders and should be independently verified before further publication or use. No responsibility can be accepted for error of fact or opinion. This does not exclude or restrict any duty or liability that Schroders has to its customers under the Financial Services and Markets Act 2000 (as amended from time to time) or any other regulatory system. Reliance should not be placed on the views and information in the document when taking individual investment and/or strategic decisions. Past Performance is not a guide to future performance. The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested.  Exchange rate changes may cause the value of any overseas investments to rise or fall. Any sectors, securities, regions or countries shown above are for illustrative purposes only and are not to be considered a recommendation to buy or sell. The forecasts included should not be relied upon, are not guaranteed and are provided only as at the date of issue. Our forecasts are based on our own assumptions which may change. Forecasts and assumptions may be affected by external economic or other factors. Issued by Schroder Unit Trusts Limited, 31 Gresham Street, London, EC2V 7QA. Registered Number 4191730 England. Authorised and regulated by the Financial Conduct Authority.