Bonds regain their appeal
We’ve been through several exceptionally easy years on the equity markets, but those days are over. Many are now turning their attention more to bonds: US and European high-yield bonds currently offer average yields close to 9%, around double the level available at the end of 2021. With bonds, investors will get their contractual yield unless there is a default. In the case of diversified investments, this means potentially high returns unless there is a significant crisis and widespread major bankruptcies. In any case, consider currency risk in investments in other currencies, all the more so if you venture into emerging market bonds.
International equities: value investing
- USA: The S&P 500 has risen by around 15% in the summer of 2023, against all expectations at the start of the year. But if we take a closer look at individual stocks, we can see that returns are extremely polarized between sectors. Riding the recent wave of enthusiasm for generative AI, US technology rose by 40%, while traditional sectors such as energy (-7%), materials (+4%) and industrials (+6%) were negative or more modest. In between these extremes, the Vanguard S&P 500 Value ETF (VOOV) is in the middle, with a return of just over 10%: Perhaps it will see stronger momentum in the future, also benefiting from AI spinoffs, albeit more indirectly than tech stocks?
- China: Concerns about geopolitics, real estate, finance and Chinese growth don’t seem to be going away any time soon. Chinese equities are currently trading at a forward P/E of 11.0, a 36% discount to global equities (15x) according to DBS, and close to all-time lows. China’s price level is close to that of Asia ex-Japan (9x-10x). This suggests that concerns about China have largely been priced in, or are offering buying opportunities at good prices.
- The European equity market is currently trading at a price/earnings ratio of 13x. Sentiment regarding analysts’ revisions to earnings per share has started to turn more negative: good earnings news (due to low expectations) does not seem likely to be repeated with high probability.
- Compared to the US, Japan appears a more affordable option. Despite the rise at the start of the year, a P/E ratio of 1.1x (and many stocks below 1x), Japan appears to be a cheap option with the potential to unlock value. In any case, Japanese equities are important for diversifying your portfolio and limiting the risks of an overweight in US equities or supply chain disruptions. Japanese equities have thus reached their highest level since 1990 and have become slightly less attractive than at the end of 2022, but this sharp rise has not materialized for all investors.*
Final tips for investors with contrarianism**
Many investors were carried away by the promise of AI during the first half of the year. For our part, we favor the value approach, focusing on share price anomalies coupled with the currency situation (see our free investment guide). In this context, Howard Marks’ contrarian approach is particularly judicious: We also believe that the best investment results come from exploiting the differences between the way things are supposed to work and the way they do in the real world. So it’s all about watching for those moments when most people are so optimistic that they think things can only get better. At such times, very high prices are justified for the majority, even if the price level doesn’t seem sustainable on fundamental criteria. To find good investment opportunities and succeed in contrarianism, Howard Marks recommends understanding
(a) what the herd is doing,
(b) why it’s doing it,
(c) what’s wrong and
(d) what should be done instead.
* The yen, for example, has weakened against the Swiss franc, and the performance is not very spectacular if the portfolio is consolidated in Swiss francs. The Swiss franc has historically struggled to stay below 0.90 to 1 USD, and could weaken. This is therefore another quarter for international investments (based on weaker foreign currencies), according to your standard regular plan, but without over-investing in view of a possible correction on the US markets in the coming months.
** Based on the article “Investor lessons from taking the temperature of markets” Howard Marks, Financial Times July 10, 2023
Sources Investor lessons from taking the temperature of markets, Howard Marks, Financial Times, July 10 2023 DBS: CIO Insights 3Q23: King, Queen & Castle
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