Pockets of Value

It’s no secret that investment markets are having a tough year. It is also true that almost all asset classes and sectors have come under pressure in the face of rising inflation, interest rates and energy costs. The big winner, as we have previously mentioned, has been the commodities market.

However, despite ongoing volatility in global equities, there are more positive opportunities to be leveraged. Two areas exhibiting these prospects are in the European and Japanese markets, with specific reference to value stocks. (Value investing can be thought of as buying companies at prices lower than their intrinsic value with a view to realising that value in the future.)

Europe and Japan

Although there has been an ongoing strain on European equities as a result of the war in Ukraine and rising fuel costs, value stocks have outperformed the generic market significantly this year. Looking at the wider European space, equities have fallen around 14.7% year-to-date, but European value investors have suffered far less, with the value index flat for the year so far. It’s a similar story in Japan, where inflationary pressures are nowhere near as high, and the Japanese value index has outperformed the wider market by nearly 20%.

Part of the reason for this is that value stocks in these regions are presenting more desirable opportunities to investors than growth stocks, which have come off from all-time highs following a period of persistent strength, especially over the course of the Covid pandemic. (Growth investing can be thought of as buying companies looking to grow their revenue and market share, and therefore their overall value.) Many of the ‘old economy’ value sectors (financials, energy, mining etc.), on the other hand, have benefitted from an economic backdrop of rising interest rates and higher energy prices.

Compared to the US market (so much of which has been driven by large tech/growth strength), Europe and Japan offer more attractively priced value stocks at this time, based on average Price to Earnings, with P/E multiples if 11.7 and 9.9 respectively. These areas of the equity market therefore offer cheaper points of entry for prospective investors, or less attractive exit points for those already invested when compared to growth equities, despite growth experiencing a more significant drawdown.

Value in Portfolios

Within our core portfolios we hold exposure to European value stocks. Although we have shared in some of the broader downside this year, our allocation to the Lightman European value fund has yielded a return of more than 5%, bucking the short-term trend for equities. We also hold an equity tracker fund that gives exposure to more cyclically driven Japanese stocks, with this holding down 5.3%, versus the broader index, which has fallen 15.1%.

It is reassuring that amidst the volatility we have witnessed this year, areas of the market and portfolios have been more defensive and appealing opportunities remain for our fund managers to utilise.

Market returns as at 26/05/2022

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