Four of the world’s cheapest markets

Just as shoppers like to bag a bargain on Black Friday, so do some investors. And, with all the turmoil this year in global stock markets, a number of areas have become much cheaper.

Here, we look at four investment areas that are trading on discount today.

1. Investment grade bonds

“The last time investment grade credit looked so good, Pluto was still a planet.”

Those are the words of Alexander Pelteshki, co-manager of Aegon Strategic Bond fund.

“People my age and up will remember that the solar system consisted of nine planets. Then in 2006 a monumental event happened when the International Astronomical Union downgraded Pluto to ‘dwarf planet’ status. This essentially meant that from that day on, our solar system would consist of eight planets only,” he said.

“It has been 16 years since that event, a rounding error in the context of a planetary life cycle, but a whole lot in the investment world. And this is approximately how long it took for the investment grade credit index (based on the Bloomberg US Corporate Bond index) to again look that attractive relative to the stock market.”

According to Alexander, as of October 2022, the Yield to Worst on the investment grade index exceeds 6%! For lay people like you and I this means that this 6% is the lowest possible yield that can be received on a bond that fully operates within the terms of its contract without defaulting. This is more than three times its yield just a year ago.

“We believe that aside from the all-in attractiveness of investment grade, this has significant implications for asset allocation decisions globally,” continued Alexander. “It offers a rare opportunity for investors to move up the capital structure and pick up yield while doing so.

“This is because the equity earnings yield is subject to the actual earnings coming through as expected (and is thereby subject to change), whereas a bond yield is pretty much guaranteed (bar a default). This degree of certainty would appeal to even the more conservative income-oriented strategies, while still leaving plenty of upside room for growth too. All in, it is another reason why we have turned more positive on investment grade credit on a 12-month horizon.”

Research Elite Rated Corporate Bond funds

2. China

According to Alquity, a number of emerging markets are cheap today, and China especially so at multi-year lows.

Fidelity International agrees, adding that a disconnect is emerging between sentiment and fundamentals when it comes to valuations in Chinese equities. “But this also creates opportunities to reposition for the country’s new modes of growth,” the company said.

Chinese equities have had a rough time of late, as investor sentiment – already weakened by the government crackdown on IT, education, and property sectors – took another blow when President Xi Jinping secured a third term as the top Chinese leader last month.

Guinness Asian Equity Income co-manager, Edmund Harriss, says that the new line-up of the Chinese leadership revealed that so shocked observers, “in all probability, reflects the reality over the past three years at least.”

“It is our view that China’s economic policy goals have not changed; that we can understand their purposes, but that the challenges faced in their implementation have risen. On that basis, we consider China to be an investable market to which investors should have exposure. We buy businesses, not countries, and we are focused on those which are in alignment with or are likely to benefit from China’s long-term economic plan.”

“New policy statements indicate China is seeking to rebalance its economy with emphases on national security, low-carbon growth, and social equality under the “common prosperity” banner,” added Fidelity. “There should be investment opportunities in areas like high-end manufacturing, electric vehicles, renewable energy, smart grids, digital economy, and innovation, where there is greater policy support. Companies contributing to China’s import substitution and self-sufficiency drive should also benefit.”

Research Elite Rated Chinese equity funds

3. Brazil

With the sharp derating that occurred over the past two years, despite the strong earnings recovery and stock market performance this year, Brazilian equities are now trading at less than seven times earnings, a more than 50% discount to five- and ten-year averages and 35% discount to the broader emerging markets, according to Liontrust.

“This is also at a time when inflation is falling, interest rates have peaked and look set to fall in the first half of next year, a situation very different to many other emerging and developed economies,” commented Liontrust’s Thomas Smith.

“The central bank was very proactive in addressing inflationary pressures and began hiking interest rates in March last year,” he continued. “This early and decisive action helps to explain the Brazilian real’s strong performance this year being one of the few currencies globally to have appreciated against the dollar. This is a far cry from the 2013 taper tantrum when Brazil was labelled one of the ‘fragile five’ economies under pressure as the Federal Reserve began talking about tapering quantitative easing and raising interest rates.

“Recession fears could continue to weigh on regional and global equities through the months ahead, but relative and absolute valuations are already at extreme levels, suggesting significant risks are already priced in.”

Eduardo Figueiredo, lead manager of the abrdn Latin American Equity fund, told us more about opportunities in Brazil in this podcast interview:

4. Smaller companies

As investors have taken a ‘risk-off’ attitude in the past 12 months or so, smaller companies around the world have come under pressure. According to the team behind LF Montanaro European Income and LF Montanaro UK Income, European small caps in particular have had a tough time, underperforming their large cap peers by the largest amount in 20 years.

US smaller companies meanwhile are now on a lower valuation than during the global financial crisis and are the cheapest they have been versus their large cap peers since the year 2000.

Montanaro says that smaller companies have typically outperformed larger companies after being on large discount and US and UK small caps currently stand out as being especially cheap versus their history.

Overall, global smaller companies are at their lowest valuation in a decade and have never been this cheap relative to large caps.

David Walton, manager of IFSL Marlborough European Special Situations, said “anecdotally we are signing a few “take private” offers for listed small companies from their majority owners in Europe.

“This week French home automation company Somfy (market cap c £4.5bn) received a bid from majority family shareholder at 39% premium to share price. This indicates that current share price levels are attractive for long term owners.”

Research Elite Rated global smaller companies funds


Photo by Artem Beliaikin on Unsplash

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