Norman Boersma and Cindy Sweeting
As the year comes to a close, some concerns about the global economy remain.
Chinese growth continues to slow, keeping pressure on commodity prices and sending deflationary impulses throughout the global economy. Growth patterns in both the United States and Europe, while positive, hardly inspire enthusiasm. Japan’s unbridled stimulus measures have yet to engineer a definitive rebound. High debt-to-GDP ratios persist globally, cracks have appeared in corporate credit markets and geopolitical issues have created a continued backdrop of uncertainty.
Value versus growth
While stocks are certainly vulnerable to near-term volatility, we think the asset class globally remains well-positioned for long-term performance. Within equities, value-oriented stocks remain particularly attractive.
Looking at the historical performance of the MSCI World Value and Growth Indexes, value has lagged growth in recent years but has tended to recover strongly in the aftermath of past periods of sustained weakness. We expect the eventual normalisation of economic and policy trends to be supportive of value-oriented equities after this pronounced period of underperformance.
Looking at opportunities across regions, we remain positive on Europe, where policy remains supportive and corporate and economic fundamentals are improving. We believe the disconnect between depressed sentiment and more resilient fundamentals offers attractive buying opportunities.
While we continue to find selective value in the dynamic US corporate sector, many US companies have broadly high valuations and extended profit margins, which makes our search for value challenging.
We remain cautious and selective in Japan, where our main concern is that reform could stop shy of the real structural changes needed for corporate Japan to gain competitiveness, improve profitability and overcome the country’s daunting debt and demographic challenges.
Emerging markets offer selectively better value to us after sustained underperformance.
Sector views
Turning to sectors, we continue to find abundant value among energy producers and their services partners, and we believe the price of oil will likely recover toward the marginal cost of production as supply and demand adjust.
In health care, major pharmaceutical firms have shown improved performance, making continued pipeline development essential to future return prospects.
Elsewhere in the sector, we favour lowly valued biotech companies with innovative pipelines offering products with limited competition or demonstrable advantages over existing therapies.
European financials continue to look attractive to us, as many have restructured and recapitalised, and have been benefiting from improving credit conditions.
Asia offers select opportunities in some mature banking markets such as South Korea and Singapore and in underpenetrated growth-oriented markets like India. Opportunities, in our view, can also be found among a diverse range of asset managers, insurers, universal banks and bourses in the developed world.
As always, our focus remains on exploiting the market’s short-term mindset and buying businesses trading at a substantial discount to our assessment of their long-term intrinsic value.
Our global sector analysts and portfolio managers scour the globe for opportunities presented by an uncertain environment, attempting to use near-term pessimism to our advantage, with the goal of maximising total absolute returns over time.
While this approach to investing can be challenging at times when we find ourselves on the wrong side of market trends, our confidence in its efficacy over a long-term investment horizon is unwavering. By seeking out overlooked value potential in the next year, we will continue to build differentiated portfolios that we believe offer significant potential for long-term value recognition.
Norman Boersma is the chief investment officer and Cindy Sweeting is the director of portfolio management at Templeton Global Equity Group
