15 Dec 2021
The fast view
Q&A with Alessandro Dicorrado
Portfolio Manager Alessandro Dicorrado explains why super-cheap valuations suggest a cheerful outlook for value investors.
Q Are value equities good value at present?
Value equities remain extraordinarily cheap, both historically and relative to other parts of the stock market – even after the value rally in Q4 2020 and at the start of 2021. And we think there are potential catalysts for value from here, including rising bond yields and inflation.
Q How might they impact value equities?
We don’t expect runaway price rises, but in 2022 there is clearly a possibility that inflation and bond yields will move higher. Even small moves could be very impactful on a market that has come to rely on extremely low interest rates and inflation. That said, we do not believe we require inflation for our value-focused portfolio to prosper. But we think it could be an additional tailwind.
Q Why might inflation be good for value?
Inflation will lead to higher discount rates, which lowers the normalised valuations of businesses. That is likely to particularly weigh on some of the more expensive companies in the stock market. There are under-priced companies in a variety of industries, and I think the market will come to realise that it is better in this environment to pay 10x earnings to own such stocks, rather than 35x earnings for some other companies.
At the same time, while some sectors will be hampered by rising costs, parts of the value universe will likely benefit from inflation – such as certain resources businesses, which will be boosted by higher commodity prices, and banks, which become more profitable as interest rates rise.
Q How are you positioning your portfolio for the year ahead?
About half of the portfolio is allocated to cyclical or recovery-related themes, with the rest invested in idiosyncratic, less correlated, single-stock stories. The themes include travel-related companies, in expectation of a COVID recovery in travel; the auto supply chain, where we think prices have been extraordinarily cheap; and energy, where we see some interesting value opportunities in oil & gas for long-term investors.
Q How do you think nearer-term market moves may impact your portfolio?
Given where the market is, investors clearly have to be mindful of a potential sell-off. How a value portfolio will fare depends on what drives it, and we may outperform or underperform in the short term. But if the sell-off is driven by investors becoming concerned about valuations, then we would expect to do better than the market, and value would be a relatively defensive allocation in that context. Clearly, a stock-market decline would also present opportunities to pick up some good businesses at appealing valuations.
Specific risks
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