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Global stock markets have certainly been through the wringer since the start of 2022, with Russia’s invasion of Ukraine having had a devastating effect.
In fact, research by fund manager Schroders reveals market valuations have fallen the most in Europe and the United States.
But the analysis also shows that the emerging markets and Japanese equities are now looking cheap in comparison to historical averages.
Here, we look at the approaches being taken by funds focused on these areas – and what could be in store for the rest of the year.
According to Duncan Lamont, head of strategic research at Schroders, there are many different measures that can be used to gauge stock market valuations. “They all have their benefits and shortcomings so a rounded approach which takes into account their often-conflicting messages is the most likely to bear fruit,” he said.
However, he also warned against simply comparing a valuation metric for one region with that of another and emphasised that valuations were useless at predicting short term moves in markets, even if hindsight sometimes tempts us to explain them that way.
“Differences in accounting standards and the makeup of different stock markets mean that some always trade on more expensive valuations than others,” he added.
The most recent detailed analysis carried out by Schroders, published at the back end of last year, revealed how emerging markets were cheapening.
This was principally due to tumbling Chinese stocks, which illustrated the point that China makes up more than 30% of this market – and more than 60% when combined with Korea and Taiwan. “They completely dominate headline performance and valuations,” said Duncan Lamont. “But this downplays the great diversity on offer.”
According to updated data to the end of March 2022 – also analysed by Schroders – the United States remains an expensive equity market on most valuation measures.
Europe ex-UK is also expensive on a couple of metrics, although has become less so in recent months. It’s a similar story with the UK, which is also looking cheaper.
However, it’s Japan and the emerging markets that are looking the most affordable.
So, which funds covering these areas may be worth considering?
The objective of this fund is to generate attractive returns by investing in companies that concentrate on the growth in consumption and services in emerging markets. The most recent fund factsheet highlighted how the invasion of Ukraine had a “dramatic impact on asset markets”, as well as the broader energy markets. “We have always treated the political situation in Russia with extreme caution, with good reason it now seems, and the strategy has no direct exposure to Russian assets,” it stated.
India and China have the highest country weightings. “The market in China had an especially difficult time,” the managers stated recently. “But encouragingly, last year end reports conclude what has been an extremely good year for the fund’s China companies, which collectively have rarely, looked more cheaply valued. We hope and expect that this sets the portfolio up for a strong rebound, especially when the Chinese government, finally realising the futility of their Covid strategy, relaxes all restrictions.”
This fund invests in Japanese companies of various sizes, although it tends to have a slight bias towards those with smaller market capitalisations. The manager, Chisako Hardie, has more than 25 years’ experience and has been lead manager on the portfolio for more than a decade.
Hugo Le Damany, an economist at AXA, was optimistic about Japan’s prospects in the firm’s outlook for 2022-2023. He highlighted the country’s subdued economic growth in 2021 as a late vaccination campaign delayed the reopening but emphasised potential positives. “The outlook is brighter and we see more tailwinds than headwinds in the coming months, especially on the domestic demand side,” he said.
This fund invests primarily in large UK companies, but with an unusual approach. As the name suggests, the manager aims to extend investors’ potential returns by buying stocks he expects to do well and also looking to make money on stocks he expects to do badly (shorting).
The manager looks for out-of- favour companies with resilient long-term business models, which he believes are ‘cheap’ considering their long-term growth prospects. He and his team must be convinced a company has a sustainable competitive advantage before they invest.
Conversely, when it comes to shorting stocks, the team will look for companies whose shares are quite expensive, yet whose underlying fundamentals are deteriorating.
Janus Henderson European Focus is a more concentrated version of the Elite Rated Janus Henderson European Selected Opportunities fund, with 30-40 holdings, which are weighted by conviction. The manager uses a combination of sector analysis and stock selection in his process, which produces a ‘best ideas’ portfolio with the flexibility to invest across all industries in the European equity market.
The manager’s pragmatic approach means he considers the overall macroeconomic environment and sector trends, as well as the criteria of individual companies – a style that has led to strong performance since his tenure began. The team is structured in such a way that it can focus on the areas where it can add most value and invest early enough in a stock – and with enough conviction – to maximise the investment opportunity.
While stock selection is paramount on this fund, its overall shape will reflect the manager’s view of the US economy. Investing mainly in US small caps, but also with a tilt to mid-caps, he uses multiple sources of information to generate ideas and to validate and test candidate companies for investment.
This fund and team show why active management is still worthwhile in the USA. Not only has the Artemis US Smaller Companies fund consistently beaten its own peers and benchmark, but it has also delivered performance well in excess of the S&P 500. What is particularly impressive is the steady and consistent outperformance.
This article was originally published 6 August 2020 and updated on 19 April 2022.