Value stocks can be found in many areas of the global stock markets, but four areas in particular command our attention.
2022 was a difficult year for the markets with a -18% return for the MSCI World index. Declining markets present opportunities for stock pickers like us to hunt for bargains that may have been unfairly taken in the sell-off. The market bottomed out in October and the latter part of the year saw value opportunities start to emerge in a number of different areas.
Below we have identified four particular areas of interest to value investors. This is by no means an exhaustive list – there is still value to be found in other regions and sectors as well – but these are the areas that pique our interest right now.
United Kingdom: retailers and home builders
In 2022, UK mid-cap companies, and in particular retailers and homebuilders, have been selling aggressively. The economic sensitivity of these companies meant that short-term recession fears dominated investor decision-making, which in turn meant that share prices in these industries fell significantly.
For homebuilders, there will likely be short-term profitability challenges. However, most companies in the sector have very strong balance sheets after years of strong returns, which should help them weather a tougher time.
Looking at the whole UK market (not just mid caps) there seems to be an additional discount for buying UK companies in most sectors compared to their European or US counterparts .
*These numbers are for illustrative purposes only and should not be considered a recommendation to buy, sell or hold. Past performance is not a reliable indicator of future performance and may not be repeated.
Europe: German banks and industrialists
While Europe as a whole appears to be attractively valued, there are still more opportunities in the market. An example is European banks which are trading on average at multiples well below their 20-year average, so it’s easy to see why we went fishing there.
*These numbers are for illustrative purposes only and should not be considered a recommendation to buy, sell or hold. Past performance is not a reliable indicator of future performance and may not be repeated.
Banks around the world are reporting significant profit growth after a decade of slump. Today, they are increasing their profits and, because of the real strength of their balance sheets, they are returning capital to shareholders. They also remain out of favor with most investors. It’s the kind of combination we like and we continue to own a number of the most attractive banks.
Elsewhere in Europe, we saw several German industrial companies land on our screens in the second half. With Germany’s dependence on Russian energy, plus broader economic uncertainty, lower expected order numbers and supply chain cutbacks, its industrial sector has seen larger price declines than elsewhere.
Nonetheless, we can still find companies with structurally growing end markets, which have experienced high single-digit revenue growth every year for a decade, which have well-capitalized balance sheets, but which are still trading at a steep discount per to our estimates of fair value. .
Emerging markets: “China, China, China”
Regulatory repression, political worries, a real estate crash, the extension of the zero-COVID policy and weakening GDP data led many investors to flee mainland businesses to China. This caused the Chinese stock market to fall far from the highs reached in 2019/2020. Far enough to mean that our valuation screen produced an abundance of Chinese companies across a wide range of sectors for our emerging-markets value-focused portfolio managers to scrutinize.
Outside of China, financial stocks are also presented as attractive, especially in Kenya and Argentina.
Global: China, US and Japanese cyclicals, US technology
China has also been a key research area for our global value portfolio managers.
Elsewhere, a number of US and Japanese cyclical stocks are starting to flash on our screen as looking very cheap, particularly in the memory and semiconductor space.
We have done a significant amount of work on the memory chip subsector, looking at a number of major global players. This comes after a fall in stock prices due to a sharp drop in memory demand and the change in the cost structure of different memory media.
Memory companies are highly cyclical but are likely to grow over time, generate decent returns on capital, and have reasonable balance sheets.
Finally, one area that many investors know has struggled consistently over the past year is large-cap US technology. Rising interest rates, coupled with some idiosyncratic factors, have seen the stock prices of a number of these former growth darlings fall significantly this year. Some of their stock prices are beginning to approach areas that have begun to pique the team’s interest, and as such, we are watching them closely as we move forward into 2023.
Originally posted by Tom Biddle, Investment Products Analyst and Simon Adler, Fund Manager, Equity Value Schroders.
