With the caveat that cheap isn’t always good and good isn’t always cheap, a little bargain hunting can still unearth some gems. Part of the problem today is that not much looks cheap: in general, growth shares still look relatively expensive and, in many cases, value shares look vulnerable. Is there anything that has fallen through the cracks?
Many of the areas that were obviously cheap at the start of the year have moved a long way, relatively quickly. The UK is perhaps the best example, with UK Smaller Companies, UK Equity Income and UK All Companies topping the sector leader board over the past six months. That said, performance still looks weak over three years, suggesting there may be further catching up to do. The most recent global fund manager survey from Bank of America Merrill Lynch showed that global asset allocators were increasingly topping up on UK assets.
It is a similar picture for Europe. While never as weak as the UK, it has benefited from the reflation trade and has now substantially reversed its recent underperformance. Paul Niven (pictured), manager of the F&C Investment trust, points out that the UK and Europe are currently seeing more ‘economic surprises’ than any other region. The US is strong, but appears to be peaking.
He says: “The key message is that positive surprise to consensus growth estimates are coming through in developed markets: the US had been strong, but it’s coming off the boil. Europe and the UK are very strong in terms of surprises to expectations and emerging markets are pretty lacklustre.”
Emerging markets cheap but not good value
Emerging markets is one of the cheapest areas today. In the investment trust universe, this is seen in significant discounts for specialist trusts, such as JP Morgan India and Aberdeen New India, trading at a 14.6% and 13.4% discount to net asset value, but also in some of the generalist trusts. The top-performing JP Morgan Emerging Market investment trust is currently on an 8% discount to net asset value, having traded at a premium earlier in the year. Russia and Latin America trusts are also relatively weak, along with the VinaCapital Vietnam Opportunity fund.
Niven says that emerging markets may be cheap, but he’s not sure they offer significant value: “The emerging market growth premium has eroded. While they do look cheap, investors want a superior growth outcome and they haven’t delivered that. Rising yields, a stronger dollar, plus a more troublesome growth outlook, that’s not a great backdrop for emerging markets.” Having had a long emerging markets position last year, he’s pulled back on the asset class because growth is unexpectedly weak. “Yes, there are decent valuations, but growth challenges remain.”
Global equity and Japan have been weak
The two other areas of notable weakness are in global equity income and Japan. Many global equity income funds have fallen between two stools – neither strongly growth nor strongly value – and have therefore missed out in 2020 and 2021. Niven has been adding back to global income stocks. Ultimately, with bond yields still low and inflation rising, demand for income-generative equities looks set to grow. Dividends are being reinstated across the world and this remains a fertile area for stockpickers.
Japan is always a difficult area and remains tough to analyse today. It would normally be a significant beneficiary of a reviving global economy, but has been held back by a slow vaccine rollout. In his most recent economist forecast, William Davies, global head of equities at Threadneedle, said: “The pace of vaccinations is expected to pick up through Q2. This should drive a sustained consumer rebound through the second half of the year, aided by policy support that has prevented disposable income taking the usual hit during a recession.
“Another area of domestic demand that looks set for a strong year is corporate capex; realised numbers tend to be higher than anticipated at the start of the year, and this year’s starting point was the highest in five years. On the external front, trade data remains encouraging and points to another strong net-export contribution to GDP in Q1.”
If this pick up in economic data revives sentiment towards Japan, share prices could move relatively quickly. Share prices have looked depressed relative to their international peers. The average fund is down 1.5% over six months and up just 10.5% over a year. This puts it bottom of the equity tables over both time periods.
There may also be a time at which parts of the growth trade revive. It is an isolated example, but many of the wind power companies that delivered fantastic performance in 2020 have come back a lot in 2021. Wind power is still a structural growth trend. Ultimately, markets have moved a long way and good value is harder to come by. Investors will have to be alert for opportunities as and when they arise.
