A Measured but Constructive Market View
The market environment for value investors over the past few years has been less than ideal, but that doesn’t mean there aren’t opportunities to be had. Templeton Global Equity Group Director of Portfolio Management Antonio Docal and Director of Research Heather Arnold say they plan to use recent market volatility to uncover values. They share some brief thoughts on issues facing investors today, including trade wars, Brexit and slowing growth in China.
Given the degree to which many markets corrected in 2018, we believe many risks are now adequately discounted in pockets of global equity markets. We are going to use the volatility we anticipate to continue to find and invest in attractive opportunities in today’s markets.
Volatility tends to rise with interest rates, and interest rates were definitely rising in 2018. Volatility spiked up from its historic lows of 2017, and we feel market swings were further exacerbated by rising political risks and signs of a slowing global economy, led by a slowdown in China and emerging markets and, to some degree, Europe.
Volatility usually increases toward the end of a market cycle, and, after 10 years of economic expansion and equity market growth, we think investors should anticipate greater volatility going forward. But, volatility in and of itself shouldn’t be feared by long-term investors, in our view. Instead, we believe it can offer good opportunities to exit fully valued holdings and add to those that are oversold. It also provides many with an opportunity to upgrade portfolios as investors continue to rightly focus on balance sheets.
The past five or six years have been very difficult for value investors. This has been primarily driven by the monetary environment that followed the global financial crisis.
When you make the cost of money close to zero, fundamental valuations don’t act as binding constraints in the way they would in a more normal environment, and, for that reason, value investing has been a very difficult place to be. In our view, we are now at the end of that cycle. The cost of money is going up, reflecting the fact that the financial system is now much more secure and the safety blanket that zero-cost of money provided is no longer necessary. This is starting to bring valuations into a much more normal position.