We cannot escape the fact that the market is beginning to look expensive at the headline level. Fortunately, we do not have to buy the index. As active investors, with a contrarian approach we are well positioned to take advantage of the valuation disparity across sectors.
Asian equity markets have had a strong run since their March 2020 lows, with the MSCI Asia ex Japan index now trading at over 2x price/book. Given that the index has not managed to sustain that level of valuation for very long historically, there would appear to be grounds for caution.
However, the composition of the market has changed over time. Tech hardware and internet businesses now account for approximately 45% of the index compared to 15% ten years ago. Many of these businesses are asset-light, giving the index a natural bias towards having a higher price to book ratio. They have also been amongst the biggest Covid-beneficiaries and drivers of index performance over the last 12 months.
As one can see in the Figure 2 below, those sectors in Asia that have enjoyed the largest re-rating in recent months, such as internet and technology companies, are now trading at a significant premium to their long-term average. Conversely, there are several unloved sectors trading at or below their long-term averages for example the financials, energy and travel-related companies. Of course, we need to be selective as some companies are cheap for a reason.
We believe that buying shares in businesses for less than they are worth is the most sustainable way to achieve attractive returns which is why we spend most of our time working out the true value of these businesses and buying when we judge them to be significantly mispriced.
We believe it is right to have a balanced strategy at the current time. We continue to have significant exposure to tech and internet stocks but have been trimming our holdings post the strong gains seen in share prices during 2020. We haven been reinvesting in selected cyclical stocks, and more recently, in the consumer staples and alternative energy sectors.
Asian and EM equities have struggled for much of 2021, with exports growth slowing after a strong recovery and China-related concerns denting investor sentiment. Yet, conditions have started to normalise, and looking forward we find reasons to be optimistic.
The value of investments and any income will fluctuate (this may partly be the result of exchange rate fluctuations) and investors may not get back the full amount invested.
As a large portion of the strategy is invested in less developed countries, you should be prepared to accept significantly large fluctuations in value.
All data is as at 31.03.21 and sourced from Invesco unless otherwise stated.
Where individuals or the business have expressed opinions, they are based on current market conditions, they may differ from those of other investment professionals and are subject to change without notice.
Where individuals or the business have expressed opinions, they are based on current market conditions, they may differ from those of other investment professionals and are subject to change without notice. This document is marketing material and is not intended as a recommendation to invest in any particular asset class, security or strategy. Regulatory requirements that require impartiality of investment/investment strategy recommendations are therefore not applicable nor are any prohibitions to trade before publication. The information provided is for illustrative purposes only, it should not be relied upon as recommendations to buy or sell securities.
