Despite a frustrating year for value in 2021, Hugh Sergeant, Head of Value and Recovery, River and Mercantile, explains how 2021 created a vast number of opportunities that Value managers can exploit in 2022:
“2021 should have been a Value and Recovery year. But the market still had many things to worry about (such as the spread of new Covid variants) and bond markets decided that real yields should be as negative as possible, despite strong economic growth and reflation. Last year therefore became another year when capital flowed into large cap companies, which have generated consistent growth in recent years. These companies re-rated (again), led by the cheerleaders for this trade: the US mega cap growth stocks. As a result, this was another frustrating year for Value managers.
Nevertheless, 2021 has set up one of the greatest relative investment opportunities of my career. The key investment factors I exploit are at relative lows, and many of the anomalies I have identified over the last year according to River and Mercantile’s proprietary “PVT” philosophy (Potential, Value and Timing), are trading on big valuation discounts, at a time when their fundamentals are improving:
- Value is at a multi-generational low point;
- Many recovery stocks are yet to see share price recovery;
- Small caps have lagged badly recently, especially in a global context providing a rich set of PVT anomalies in this segment of the market (including growth stocks, for example whilst Nasdaq hits all times highs over half of the constituents are down more than 50%);
- Re-opening plays are back to relative lows;
- The best hedges on interest rate rises namely banks still trade on big discounts to book value;
- Consumer cyclicals are depressed because of cost of living increases which are now overly discounted;
- China internet stocks trade on single digit earnings multiples;
- Non-US stocks trade at record discounts to their US peers with UK equities one of the most under-rated;
I could go on. There are a huge number of anomalies for value managers to exploit this year, and perhaps we are now seeing the catalysts for these anomalies to generate alpha – a combination of Omicron worries fading, and real yields turning less negative, as Central Banks withdraw from artificially-depressing bond yields.
If the very recent swing in big picture dynamics continue, we are well-placed to be in a good position in 2022.”