Even before the tariff-induced market rout, value investors were worried that U.S. stocks were expensive and dominated by a handful of technology stocks. Indeed this was the consensus at the Value Invest conference in New York on March 26 — just a handful of days before Liberation Day.
Although few investors expected the sweep of Trump’s tariffs, and one of the steepest stock declines in history that followed, value managers had already been looking in Japan, Korea, Brazil and other countries for potentially undervalued companies.
But with the U.S. stock markets showing the worst start to a presidential term in modern history, this has been no normal market. With U.S. stock prices falling across the board, what may have been overpriced ten days ago may now be cheap.
In speaking this week to Dave Iben, portfolio manager at Kopernik Global Investors, who was also present at the event, the implication was that this is in fact feeding time at the value investor zoo. While the U.S. has seen sharp decreases, it remains expensive, he believes and because the shocks are being felt around the world there are in fact increased opportunities to buy companies that have been identified as undervalued elsewhere.
“For fundamentals-based value investors volatility is not risk, it is opportunity. Over the last week, we had Japan, Taiwan, Hong Kong markets moving double digits up and down. “The idea that the Nasdaq is worth 12 percent more than it was an hour ago is ridiculous, whether it’s too expensive then or too cheap now. This volatility is making people change their minds minute to minute, hour by hour, but the value of the companies has not changed at all and that gives us opportunity.
“So when they hit Hong Kong, we can buy companies in Hong Kong, when they hit Japan, we can buy them there. And then when they mark them up double digits, we can trim that to buy back when they’re not. So it’s actually been kind of exciting.”
He added that while stocks like Tesla may look to be good value at the moment it is important to recognize that the price has gone up more than 500 percent in the last five years and remains overpriced for an auto company.
“People should not be quick to rush back into most U.S. stocks, whereas a lot of other stocks around the world are not even above where they were back in 2007 and you can buy pretty good companies there that are inexpensive on earnings, book value, sales, cash flow,” Iben added.
U.S. stocks are not worth the risk in the current environment.
“It’s all about price, I don’t care how good the U.S. is, it is too expensive. Stocks have been getting cheaper and cheaper, but the index has been getting more and more expensive,” he added. “It’s time to get out of the index... and into the things that have been left behind, which are mostly outside the country.”
The dominance of the magnificent seven technology stocks, which masked market changes for some time, is only now becoming apparent, according to Kim Shannon, founder of Sionna Investment Managers, speaking at the Value Invest conference in New York on March 26. She referred to this trend as a “stealth value recovery.”
“In Canadian and European markets... you’re seeing that the value benchmark is seriously outperforming the growth benchmark overall,” she said.
Speakers at the event in March were keen to promote individual stocks from around the world, with several indicating that Japan is ripe with companies with desirable criteria. “Japan has a shrinking population, a falling fertility rate and an increasing death rate. The currency has depreciated, and the number of vacant homes has increased,” said Anand Vasagiri a portfolio manager for the Artisan International Explorer strategy, suggesting it has no shortage of cheap, undervalued businesses.
Those trends have made decorative paint company Kansai Paint cheap. But “only 37 percent of the company’s revenues come from Japan at all. If you actually look under the hood, the rest actually comes from outside of Japan, from India, Europe, Asia, North America and Africa. Clearly the exposure is to global industrial activity.”
Some markets that you would not expect to offer value are also under consideration. Iben said that his firm is planning to spend two months in the U.K. this summer to identify value investments as a result of Brexit. but which he expects to rebound. Mobile company Vodafone and asset manager Schroders were are investments that the firm hopes to add to.
It is not just built-up economies that are proving attractive, emerging markets too have potential bargains.
“Emerging markets make up 76 percent of global land, basically half of world’s GDP, depending on how you calculate it, and it’s being given away for 10 percent of the index,” said Iben in March. “We think the world’s a big place. Is it possible that all those countries and all those companies and all those people lack innovation? I think not.”
“There’s got to be some exceptional companies. It’s got the vast majority of the world’s land and people and businesses. We think perception will swing back to emerging markets.” Cocoa companies in Ghana and the Ivory Coast are examples of companies that offer value amid global shortages. There is a cyclicality to the U.S. markets that can be mapped: they do well for twenty years and then they do badly for twenty years. Iben said, but it was quite challenging to predict when the change would come. For example, several clients asked him to exit the U.S. in 2008 following the financial crisis when stocks were cheap and the system looked to be weak, but in doing so they missed out on several years of subsequent gains.
“They were wrong, of course, the dollar’s gone up and stocks have gone up. Recently, people have been saying the opposite: ‘you should only be in the U.S., why would you be anywhere else, we have all the innovation and the good companies, we have the creativity and the biggest military. We have everything, why would you invest anyplace else?’ he said. “But that kind of bullishness is what leads to overpriced markets.”
He expects much of the money that has flowed into the U.S. in recent years to flow back to emerging markets; and that could mean significant flows out of large-cap U.S. stocks.
“If you have $3 trillion in the stock of Apple or Nvidia and a trillion comes out, that is big money that could move markets like England or Korea, or a sector like small caps or telecoms.”
There was also chatter of Russia at the event, and indicators that investors were refocusing their telescopes on potential opportunities there after being largely ejected following the invasion of Ukraine and the subsequent financial sanctions imposed on the country.
Although this raises ethical questions, it did not appear that many in the room were overly concerned, suggesting that a “good” investor could push for positive changes at a Russian company.
