Value investors have had a rough ride over the past 18 months, but the tide may now be turning due to five major catalysts, says US fund manager Mark Donovan.
Amid fears over the global economy since the end of 2014, ‘expensive defensive’ and ‘glamorous growth’ stocks have been sought by investors seeking either perceived safety or higher earnings. The ‘sweet spot’ that is value stocks – those companies whose share prices do not fully reflect their earnings potential – has been largely shunned.
But better times may now lie ahead, particularly for the big established companies which are likely to lead earnings growth in the coming months and years, says Donovan, co-portfolio manager of the Robeco Boston Partners US Large Cap Equities fund.
As a long-time bottom-up value investor, Donovan follows the Boston Partners ‘three circles’ philosophy of only buying stocks which display the core value element, along with strong business fundamentals and momentum – where the company is deemed to be getting better rather than worse, and so can benefit from share price improvements.
“The narrow, growth-driven market environment over the past 18 months has been inhospitable to our style of investing,” says Donovan, who manages the US Large Cap fund with David Pyle. “This is typical of late-cycle market behavior which often creates the conditions for a strong reversal, particularly in unloved areas. However, there are now several market catalysts that may precipitate such a reversal.”
Donovan sees five major catalysts that could now place the odds in value’s favor:
The impact of a reversal in sentiment could be considerable, particularly as many of the market’s wobbles have been caused by exaggerated fears over a growth slowdown in China, a US recession, and even another financial crisis, Donovan says. “While growth expectations have undoubtedly been downsized, the worst fears rarely materialize, and there are counter arguments for many; the low oil price, for example, has benefits as well as drawbacks,” he says.
“As is often the case, short-term market action is driven by sentiment, which is responding very negatively to concerns of slowing global growth and the potential for an economic crisis. However, segments of the US market such as the banks, commodities and industrial companies are being valued as if there will be a significant recession. This is creating ‘three circle’ opportunities in Financials, Industrials and Energy that Boston Partners is selectively pursuing.”
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