Company valuations seem to imply a high probability of a US and global recession which has not materialised as yet, Wright explained.
“If this more benign macroeconomic picture endures, I believe the market will re-appraise the prospects of the stocks currently in the reject bin, and the gulf of valuations will have to narrow,” said Wright. “Could 2016 finally be the year for value investors? In my experience, when the risk premium is so high, it can help to focus on the fact that the price you pay for the stock more than fairly compensates you for the uncertainty of the outcome,” he added.
The last few weeks have shown early signs that a change in leadership of equity markets could be underway he said, and in many cases investors’ positioning over the past two years will have left them ill-prepared for this, noted Wright.
He explained that the current conditions call for a different approach to stock picking.
“My clients will know me a contrarian bottom-up investor, and usually I am keen to reduce as far as possible any macro or thematic biases to the fund,” said. “However, in the current environment, a contrarian investor cannot help but be attracted to those parts of the market that don’t fit the quality perception, and where a wider range of investment outcomes is possible. Many of these ‘value’ categories have some exposure to the economic cycle.”
“Using broad brush strokes; banks, oil and construction stand out to me as areas that seem to be pricing in a recession,” said Wright. Meanwhile, the portfolio manager believes the ongoing adjustment in industrial sectors can ensue without a severe hit to confidence in the service and consumer sectors.
