In focus

Four "flavours" of value for equity investors


2022 was a difficult year for markets with the MSCI World index returning -18%. Declining markets offer opportunities for stockpickers like ourselves to hunt for bargains that may have become unjustly caught up in the broader sell-off. The market hit its low in October and the latter part of the year saw value opportunities start to emerge in a number of different areas.

We’ve identified four particular areas below that are of interest for value investors. This is by no means an exhaustive list – there is still value to be found in other regions and sectors too – but these areas are the ones that are piquing our interest currently.

  1. UK: retailers and housebuilders

2022 saw UK mid-caps, and in particular retailers and housebuilders, sell off aggressively. The economic sensitivity of these businesses meant short-term recessionary fears dominated investor decision-making, which in turn meant share prices in these industries have fallen a long way.

For the homebuilders, there are likely to be challenges to short-term profitability. However, most companies in the sector have very strong balance sheets after years of high returns, which should help them weather a more difficult period.

Looking across the whole UK market (not just at mid-caps), it seems there is an additional discount for buying UK companies in most industries compared to their European or US counterparts.

607077-UK-equities-discount-chart1.png

*These figures are for illustrative purposes only and are not to be taken as a recommendation to buy, sell, or hold. Past performance is not a reliable indicator of future performance and may not repeat.
  1. Europe: banks and German industrials

While Europe as a whole is looking attractively valued, there are  even greater opportunities within the market. One example is European banks which are on average trading on multiples well below their 20-year average, so it's easy to see why we've gone fishing there.

606294-European-banks-chart1.png

*These figures are for illustrative purposes only and are not to be taken as a recommendation to buy, sell, or hold. Past performance is not a reliable indicator of future performance and may not repeat.

Banks around the world are seeing significant profit growth after a decade in the doldrums. Today they are growing earnings and, as a result of real balance sheet strength, are returning capital to shareholders. They also remain out of favour with most investors. That’s the kind of combination we like and we continue to hold a number of the most attractive banks.

Elsewhere in Europe, we have seen a number of German industrial businesses come onto our screen in the second half of the year. With Germany’s reliance on Russian energy, plus wider economic uncertainty, lower forecast order numbers, and supply chain squeezes, its industrial sector has seen larger share price falls than elsewhere.

Nonetheless, we can still find businesses with structurally growing end markets, that have delivered high single-digit revenue growth every year for a decade, have well-capitalised balance sheets, yet still trade at a wide discount to our estimates of fair value. .

  1. Emerging markets: 'China, China, China'

Regulatory crackdowns, political worries, a property market crash, extended zero-COVID policy and weakening GDP data led many investors fleeing mainland companies in China. This caused the Chinese stock market to fall far from the heights reached in 2019/2020. Far enough to mean that our valuation screen has been throwing up an abundance of Chinese businesses across a broad range of industries for our emerging markets value portfolio managers to examine.

Outside of China, financials are also screening as attractively valued, notably in Kenya and Argentina.

  1. Global: China, US and Japanese cyclicals, US technology

China has also been a key area of research focus for our global value portfolio managers.

Elsewhere, a number of US and Japanese cyclicals are beginning to flash on our screen as looking very cheap, especially in the memory and semiconductor space.

We have done a significant amount of work on the memory chip sub-sector, looking at a number of the major global players. This comes after a fall in shares prices owing to a sudden fall in memory demand and the change in cost structure of the various memory mediums.

Memory businesses are very cyclical but are likely to grow over time, make decent returns on capital and have reasonable balance sheets.

Finally, an area that many investors will know has struggled consistently over the past year is large cap US technology. Rising interest rates, alongside some idiosyncratic factors, have seen the share prices of a number of these former growth darlings fall considerably this year. Some of their share prices are beginning to approach realms which have begun to pique the team’s interest and as such we are keeping a close eye on them as we move further into 2023.

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