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Dislocations in valuation reward patient investors

24 Nov 2015

"Over the past four or five years global equity markets have returned around 15 per cent per annum, but this is set to change. Indeed, a real valuation dislocation is evident within equity markets currently, and this provides investment opportunities for global equities managers if they take a contrarian approach."

The September quarter marked 10 years since the inception of Wingate’s global equity strategy, whose performance was ranked second over the 10 year performance period in the Morningstar Australian Institutional Sector Survey (as at 30 September 2015).*

Commenting on the movement in markets over the past decade and what is ahead for the next, Mr Padowitz said the past 10 years have been about as challenging a time as we are likely to see in global investment markets.

"The past decade provides a great snapshot in time for testing an investment strategy. We’ve seen a full cycle of events, from booms to busts and back again.

"Globally, it has been a period of great change. There was the bubble in US housing, and a surge in stock prices, which was followed by the GFC. This caused a dramatic change in the global financial services landscape.

"We’ve seen dramatic drops—and sporadic spikes—in volatility, a complete collapse in commodities and a fluctuating Australian dollar.

"Delivering strong performance over this period helps validate our strategy of capturing most of the up markets and less of the down, seeking to deliver higher levels of income and lower volatility.

"One of the biggest lessons learnt has been that there is nothing policymakers won’t do to avoid pain. The remarkable resilience of the US economy has also been apparent during this time."

While the recent strong returns in global equity markets have been driven by a combination of improving economies following the GFC; rising profit margins; and P/E expansion due to an increasing risk appetite (alongside very accommodative monetary policies), this is no longer the case.

"The environment is changing again," Mr Padowitz said.

"Interest rates are unlikely to go any lower and are more likely to increase in the US and the UK, profit margins are at all-time highs, and P/Es are historically expensive. This all leads to a more challenging future."

However, there are still opportunities to be found. Mr Padowitz said we are entering a volatile investment environment that should favour an active, contrarian equity management style.

"The Wingate global equity strategy typically benefits from volatile markets by finding more compelling investment opportunities in such an environment.

"There are arguably far more opportunities now for long-term investors than there have been in the past couple of years. This is a function of more volatile global markets.

"Embracing market volatility can lead to opportunities for long-term investors.

"When you look through the cycle, there are companies that are trading at significantly depressed valuations.

"A share’s intrinsic value and the degree it differs from the market price is ultimately sentiment-driven. Long-term investors may consider seeking investment opportunities that go against prevailing market trends rather than always following what others are doing.

"Identifying dislocations between market valuations and company fundamentals can create real opportunities for patient investors in global equities," Mr Padowitz said.

Further information: Chad Padowitz Chief Investment Officer, Wingate Asset Management P 03 9913 0704 | E

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