Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 513

From stockmarket boom to stockpicker’s opportunity

For anyone expecting the phenomenal stockmarket returns of the last decade to keep rolling, we have some sobering news. They probably won’t. If history is any guide, the best of times for investors tends to be followed by the worst of times. Given the post-GFC era was an amazing period for global equities, the next decade could prove much more challenging. But more than 30 years of contrarian investing has taught us that good stock picking results can make an enormous difference when equity markets are generally weak, and now, more than ever, is the time to invest differently.

Below are our observations of the current market environment that investors should consider when making decisions.

The good times don’t roll

If the best of times really have come to an end, what can investors expect from the coming period? Whilst we don’t own a crystal ball, the following chart (which we call 'The Sawtooth') paints quite an ugly picture of what the next decade or so could look like. History demonstrates that periods of incredible up-cycles are followed by decades-long periods where returns are disappointing (and sometimes negative after inflation).

With the bubbly excesses of the previous decade only just starting to deflate, and valuation gaps still astonishingly wide, it’s likely markets are a long way from completing the post-bubble deflation process that has been typical of history. Put simply, we think there is likely more pain to come.

Embrace regime change

Faced with the reality that the worst of times are upon us, how can investors do better than the market? One of the most important lessons from history is that the winners (the stocks that perform well) rarely persist from one cycle to the next, meaning investors hoping to outperform can’t simply invest in the same things that did well in the previous decade. To do better than the market, you need to invest in things that are different from what’s been winning lately – the stocks likely to become the market leaders in the new regime. And that’s where things get exciting for active, contrarian, value-orientated investors.

Valuation matters

Because the most recent 'everything bubble' rose to such dizzying heights, it gave rise to historically wide valuation gaps between the 'haves' (growth stocks) and the 'have-nots' (value stocks). In fact, valuation gaps today are as wide as they have been at any time since the Great Depression—almost 100 years ago—and remain wider than they were at the peak of the Tech bubble! Valuation gaps matter because they are a good indicator of forward returns for value stocks compared to their growth counterparts. As the “everything bubble” continues to deflate and valuation gaps narrow, richly priced growth stocks may suffer, giving cheaper value stocks the opportunity to thrive. This provides some exceptional opportunities for astute investors who combine the benefits of a long-term view with a willingness to look very different.

Exploiting the opportunity

As contrarians, we are naturally drawn to areas of the market that are out of favour and thus potentially undervalued. Although we are not beholden to any particular style of investing—be it value or otherwise, today we are finding the best opportunities in the market are among value stocks. Given its current attractiveness, it should come as no surprise that Orbis Global’s exposure to the value factor is currently at a record high, with value-oriented holdings accounting for around 70% of the portfolio. In particular, we are finding opportunities in areas like critical infrastructure, energy and materials, quality cyclicals, and selected banks, as illustrated in the chart below, which makes us excited about the potential for relative returns, even as the broader market eyes a protracted 'worst of times' phase.

Perhaps the most striking feature about the value-orientated holdings our bottom-up, contrarian research has identified is just how cheap they are compared to the World Index, which trades at about 20x earnings. These are a collection of businesses that we believe are better positioned for the coming environment and trade at much lower multiples than the World Index.

Blunting 'The Sawtooth'

If, as 'The Sawtooth' predicts, the market is facing a prolonged period of disappointing returns, there’s one clear way investors can avoid the same fate – invest differently to the market. Whilst the good times might be over for the market in general, the future is much brighter for savvy value-orientated investors willing to think and invest differently.

 

Shane Woldendorp, Investment Specialist, Orbis Investments, a sponsor of Firstlinks. This article contains general information at a point in time and not personal financial or investment advice. It should not be used as a guide to invest or trade and does not take into account the specific investment objectives or financial situation of any particular person. The Orbis Funds may take a different view depending on facts and circumstances. For more articles and papers from Orbis, please click here.

 

2 Comments
Steve Dodds
June 17, 2023

Whilst, on first glance, this article seems to make sensible points, deeper investigation raises a few issues. Firstly, whilst the scary sawtooth graph may be technically correct depending on how one plucks numbers to prove a point, the actual returns from the sharemarket over the past 100 years tell a different story. https://1.bp.blogspot.com/-DMh9RhC-LAo/X4t_hIfRmnI/AAAAAAAACPY/V7sFxkbC1986CbyLKOwgR4yaO0_XupTbgCLcBGAsYHQ/s950/Dow%2BLong%2BRange%2BTrend.jpg The only period where a ten year rise has seen a following ten year dip was the the peak and trough of the Great Depression. Even with that, the index has averaged 10% growth over the past 100 years, and has never failed to reach a previous peak. This may change. But unlike Orbis would have us believe, it never has previously. The value argument may also prove to be true. The market may revert to the mean value proponents predict. But it also may not. The prediction has been made often over the past few years and, a brief post-covid burst aside, continues to be nebulous. But the biggest issue I have is the lede about the current market being a stockpicker's opportunity. That's what was said before the quite large dip last year. That active investing would pick the creme from the dross in a falling market. Alas, SPIVA data showed that, just as during the bull market, active funds generally underperformed in the bear market. Now the the S&P500 has returned to bull market, guess what? Most active managers have lagged again. I don't want someone who invests differently, I want someone who invests successfully. I don't admire an active value fund for sticking to their principles whilst underperforming for the past 15 years in the hope that their day will come.. I don't admire active growth funds (hello Hyperion) for sticking to their principles and seeing years of gains evaporate in two years. I expect active managers to adjust their portfolios to perform better than the index in any market. According to recent Marketwatch data, neither have their competitors, regardless of philosophy. I was a Hyperion investor and (if I hadn't sold) would have been very annoyed to see my fund drop 45% in a year because the manager decided to stick to their guns as opposed to actively managing by selling high and buying back in low. I'd be annoyed reading this article knowing my investment had underperformed because the manager thought sticking to their value guns was more important than making me money.

Sonya
June 16, 2023

It's interesting how value stocks turned in 2022 and have turned again in 2023. It's hard to know what the short-term future holds, though there are compelling arguments in this article about what may happen in the long-term. Good food for thought.

 

Leave a Comment:

     

RELATED ARTICLES

The companies well placed to weather an economic storm

Passive investing has risks too

Is the market’s recession conviction warranted?

banner

Most viewed in recent weeks

An important Foxtel announcement...

News Corp's plans to sell Foxtel are surprising in that streaming assets Kayo, Binge and Hubbl look likely to go with it. This and recent events in the US show the bind that legacy TV businesses find themselves in.

Welcome to Firstlinks Edition 578 with weekend update

The number of high-net-worth individuals in Australia has increased by almost 9% over the past year, and they now own $3.3 trillion in investable assets. A new report reveals how the wealthy are investing their money.

  • 19 September 2024

The challenges of building a portfolio from scratch

It surprises me how often individual investors and even seasoned financial professionals don’t know the basics of building an investment portfolio. Here is a guide to do just that, as well as the challenges involved.

Creating a bulletproof investment portfolio

Is it possible to build a portfolio that performs well in any economic environment? So-called 'All Weather' portfolios have become more prominent of late, and this looks at what these portfolios are and their pros and cons.

What's left unsaid in Australia's housing bubble

The current difficulties confronting housing policy partially stem from an explosion of mortgage debt. We've engineered a price for housing that will cause a severe problem for future generations – if it isn't addressed.

Which asset classes are a bargain now?

Many assets have enjoyed a positive year, leaving some of them looking pricey. Here we compare valuations of cash, bonds, stocks, and property, and suggest where investors may be able to find opportunities.

Latest Updates

Retirement

The quirks of retirement planning with an age gap

A big age gap can make it harder to find a solution that works for both partners – financially and otherwise. Having a frank conversation about the future, and having it as early as possible, is essential.

The everything rally brings danger and opportunity

Most market players today seek quick rewards and validation of opinion. Outsiders willing to combine new technology with old-fashioned patience and focused analysis can prosper.

Investment strategies

Portfolio construction in the real world

Building a portfolio is like building a house. This framework can help you move towards your goals without losing sight of reality or leaving yourself vulnerable to market storms.

Shares

Feel the fear and buy anyway

In this extract from his new book, the co-founder of Intelligent Investor reveals how investors can avoid critical mistakes and profit from opportunities in collapsing share prices.

Investment strategies

The risks of market concentration and not staying invested

MFS chief investment officer and CEO elect Ted Maloney talks market risks, similarities between Trump and Harris, and the most important thing investors can do to avoid destroying value.

Gold

Gold's important role as geopolitical tensions rise

Equity markets have traditionally struggled at times of sustained geopoltical tension. Gold, on the other hand, has thrived and can provide investors with protection against "unknown unknowns".

Strategy

The changing face of finals footy and the numbers behind it

A well-meaning AFL rule change in 2016 seems to have had unintended consequences. The top teams might cry foul but AFL bosses are unlikely to be too miffed about the outcome.

Sponsors

Alliances

© 2024 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.