The seesaw of sentiment - value investors are not miserable, they just enjoy difficult times
The month of January is inevitably accompanied by a mass of forecasts as to how the economic environment will pan out over the coming 12 months. Setting aside our longstanding and oft-mentioned doubts about the worth of trying to predict macroeconomic factors, most forecasts this year have tended to be pretty bearish about the prospects for the UK, Europe and indeed the world.
With the consensus view in the UK, for example, pointing to the Olympics, the Queen’s Jubilee and precious little else as potential bright spots, people are steeling themselves for a very difficult year. However no matter how bad the outlook seems, it’s important not to become blinkered and to adopt the mind-set that the economy, and equity returns, are condemned to be miserable forever.
Now, some people might find it unusual to hear a value investor encouraging people to be a little more upbeat – after all, we have over the years gained something of a reputation for being miserable souls, always moaning during rising markets about how things are too good to be true and cannot continue heading upwards forever.
However, whilst value investors do tend to be more gloomy than most in the good times, the reverse is often true in bad times. As the world as a whole grows more pessimistic and that sentiment starts to become reflected in the valuations of companies on the stock market, value investors grow more optimistic about the outlook for future returns – not over any single year, of course, but certainly in the longer term. The general retail or house building sectors in the UK are prime examples of this at present, where the market today sees only negatives we see some compelling long term investment opportunities for those willing to be patient.
We are all affected to some extent by the environment in which we operate but value investors strive to remain more neutral than the crowd with a view to profiting from everybody else’s extremes of emotion. As such, while most people are becoming increasingly negative about the economy or certain sectors of the stock market – and perhaps for some very good reasons – it is precisely when everyone else is worried that things become more interesting in our eyes. Being realistic about the outlook is fine, but the inability to have just a little bit of optimism about what the future might hold can be a very costly mistake for investors in the long run.
Fund Manager, Equity Value
I joined Schroders as a graduate in 2005 and have spent most of my time in the business as part of the UK equities team. Between 2006 and 2010 I was a research analyst responsible for producing investment research on companies in the UK construction, business services and telecoms sectors. In mid 2010 I joined Kevin Murphy and Nick Kirrage on the UK value team.
The views and opinions displayed are those of Nick Kirrage, Andrew Lyddon, Kevin Murphy, Andrew Williams, Andrew Evans, Simon Adler, Juan Torres Rodriguez, Liam Nunn, Vera German and Roberta Barr, members of the Schroder Global Value Equity Team (the Value Perspective Team), and other independent commentators where stated.
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