The slight correction we saw towards the end of the week did not undermine the positive sentiment generated by various good publication stories, such as Volkswagen, AMS and BNP Paribas. These three sectors (automotive, semi-conductors and banking) are the ones that have, for many months, suffered from the trade war between the United States and China and investors’ distaste for lower trading multiples. With the herd-instinct impetus favoured by passive management techniques, investors in recent years have stuck to buying only certain kinds of equities, without really taking valuations into account.
Active management (particularly techniques that focus on the value approach), which is no longer attracting investor inflows, now finds itself back in the position it occupied during the first decade of this century. At that time, it struggled to convince its critics that the differences in valuation between certain sectors (internet compared to traditional businesses) were not an accurate reflection either of micro-economic reality or even of historical averages. The markets still operate on mean reversion, although this reversion can take years, or even a decade. Since April, the rotation towards value stocks has been tempting for relatively successful start-ups. European banking appears to be the most iconic sector that in itself sums up all that has been wrong with eurozone economies over recent years; crippling regulation, lack of growth, political risk, legal sanctions, interest rates that are too low. That is why we should keep an eye on it, now the outlook is clearer.
Political issues (negotiations between China and the US, Brexit, the European elections) no longer seem to constitute major concerns for the markets. Macro- and micro-economic issues are back in the spotlight. At such times, investors should get back to the fundamentals of valuation and believe in this much-vaunted “mean reversion”. Bonds are incapable of generating the levels of performance that some equities are currently offering through their generous dividends. However, to give food for thought to the staunch defenders of the theory of secular stagnation, we should bear in mind that there have also been some disappointing results in the United States (Google), as well as in Europe (Orange), and that these could account for some less-than-positive days on the stock-markets.
Ultimately, investors should remember, all the same, that in these early days of May, businesses are still not signalling caution as regards the economic climate. This would, therefore, suggest that the equity markets should be seen as potential generators of performance in the months to come.
Igor de Maack, Fund manager and spokesperson at DNCA. This article was finalised in May 3rd, 2019.
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