Global equities markets are likely to deliver nominal or even zero returns over the next five to ten years, but it is still possible to identify good value companies that will deliver solid returns over the same period, said Chad Padowitz, chief investment officer of Wingate Asset Management.
"In our view, equity markets are currently the most expensive they’ve been in decades," Mr Padowitz said.
"This is being driven by companies that have dividend policies that offer a proxy for bonds, forcing global equities indices to levels that we think are unsustainably high.
"As bond yields fall, a number of investors are flocking to stocks that they see as a proxy for bonds – that is, buying shares in companies that they believe deliver solid dividends – and they are doing so by selling out of other sectors. This creates good opportunities for those investors that don’t want to follow the herd.
"The companies favoured by people looking for a bond proxy include those that are very long duration, low volatility assets, such as those in the consumer staples, telcos, infrastructure and utilities sectors. These companies are subsequently trading at substantially higher valuations than would usually be the case.
"In effect, there is a great deal of confidence in the reliability of cash flows for some companies very far out into the future.
"At the same time, there are sectors that are very cheap, and these are the opportunities that we are currently focused on, looking at shorter durations, lower P/E multiples, and higher free cashflow yield."
Mr Padowitz said that these pockets of opportunity are not broad-based but for savvy investors, they are well worth seeking out.
"We see most opportunity at the moment in US financials, which are trading at their cheapest valuations relative to the market in around 90 years, especially compared to book value.
"There are also good opportunities in certain segments of healthcare in the US. It’s usually an attractively priced sector in this kind of economic environments but this isn’t happening at the moment. The election cycle has thrown up some negative sentiment but we think that valuations will revert upwards.
"Other sectors with good potential include capital equipment, energy and commodities.
"These sectors will benefit from rising interest rates, at the expense of those who benefit from falling rates."
Mr Padowitz warned that investors should be prepared for nominal, and even uninspiring, returns going forward.
"Global markets could well deliver zero returns for the next five to ten years – we believe markets are currently that expensive.
"Nonetheless we remain very optimistic about the potential for experienced managers such as ourselves to generate solid returns for investors, thanks to the substantial value versus quality divergence.
"Combined with the income from our option approach – which has never been less than seven percent – in our view, our investors are more likely to see stable and reliable income," he said.
Wingate Asset Management is a specialist international equities fund manager that invests in a concentrated portfolio of high quality companies from around the world, diversified across sectors and geographies. It was formed by a joint venture between Australian Unity Investments and Wingate Group in 2008.
A value manager, Wingate seeks to pay less than intrinsic value for stocks and invests in companies with high cash flows, strong balance sheets and typically large market capitalisations.
Wingate’s flagship fund, the Wingate Global Equity Fund, utilises an innovative implementation approach that enhances returns and creates a buffer against losses. The benefits of this approach are equity upside with less downside risk, lower volatility of returns and income generation.