焦點對談—發掘價值股和分散投資的時機

This is an edited audio transcript of the Talking Heads episode Time to unearth value stocks and diversify

 Daniel Morris: Hello and welcome to the BNP Paribas Asset Management Talking Heads podcast. Every week, Talking Heads will bring you in-depth insights and analysis through the lens of sustainability on the topics that really matter to investors. In this episode, we’ll be discussing multi-factor sustainable US value investing. I’m Daniel Morris, Chief Market Strategist, and I’m joined today by Carmine De Franco, Head of Quantitative Equity. Welcome and thanks for joining me.

Carmine De Franco: Great to be here.

DM: I think it’s good for us to take some time and think about value investing. We appreciate over the last couple of years, it has been a lot about growth. With that, as we’ve seen recently, comes volatility and times risk, whereas with value stocks, we hope for good returns, but perhaps a little less volatility. So, let’s dive into that topic if we can, Carmine. Maybe give us a bit of a refresher: What is value investing and is it still relevant?

CDF: The best way to see it is to consider equity markets as an efficiency machine. Markets tend to be efficient over the long run, but of course you bet on the idea that market prices reflect the fundamental value of a business and some market expectations. But on a daily basis, we see deviations between the market price and the real value of a company.

This is where value investors come in. It is an investment style that allows you to identify attractive businesses at attractive valuations. You hope that when the market realises it, the price will converge to the fundamental price. This is where you make a gain.

It’s a style that requires process, discipline, focus. It’s not a coincidence that the majority of the iconic figures in the investment communities are value investors. At the end of the day, either you are a passive investor, so you track an index, you follow the market, or you are a value investors because, in the end, we all are chasing companies that are less expensive than what they ought to be. This is value investing even today.

DM: We’ve all seen what’s happened in the US equity market over the last year. Given the particularities of the US market, does value investing really have a role to play?

CDF: It’s easy to say that the US is one of the most challenging equity market given the fact that a small number of gigantic tech stocks have been driving the performance of the entire market. But if you look, for example, at the last 10 years, for instance, a little bit more than half of the performance of the S&P500 came from multiple expansions. Today, we are in a situation where the US market is very expensive. Today, the US market is paying less than US risk-free rates, which is kind of an enormous situation from an historical point of view. Today, it’s time to put valuation at the core of the investment process, so, how much am I paying today for companies that tend to be good, but underappreciated by the market.

This will be, in my opinion, essential for the foreseeable future, even in the US. Market returns today make a pretty good case for value investing. We see the outperformance of Europe over the US.

DM: How do you see value investing in the near future?

CDF: It’s always difficult to make predictions. The example of Europe is also related to the geopolitical situation and a catch-up effect. When there is a large divergence in valuations, convergence is expected. Given all the uncertainties coming from the macroeconomic environment, the political landscape, this is the scenario where markets might make mistakes. Investors might be uncertain how to correctly assess the value of a business. So,  in these scenarios, valuation matters. In case of high volatility, and this is what we are seeing in the US, including in the hot sectors like tech, finance, healthcare, for instance.

DM: Now, of course, the growth investor is going to say, well, as long as I have earnings growth, it doesn’t matter all that much. Does buying cheap stocks represent an efficient way to implement a value strategy?

CDF: It’s a focal point because, if you focus on buying cheap stuff, you will skew your portfolio towards stocks that are cheap, but for good reasons. For example, lack of growth opportunities, or higher risk stocks, or lower quality stocks. Especially in the US, the best way is to take a more holistic approach, where you put valuation at the centre of the investment process, but at the same time, you look at features such as quality, risk, trends. In the end, what you would like to do is to protect yourself from changes in trends, risk appetite, qualities, avoiding the value trap.

DM: We’ve made reference to the Mag-7 and clearly the importance of artificial intelligence as a driver for markets over the last year or so. The expectation is that AI will have a fundamental impact on global economies. How could that affect value investing?

CDF: I think, today, the focus has been mainly on the AI infrastructure, those who build the chips and the models. For me, it’s not yet clear how all of this can be monetised and especially how this will improve productivity because this is what matters from the bottom line. Most of the data is currently sitting within businesses because they know their customers, they know the operations, so they can train specialised AI for their needs. So, it’s not impossible that the winners could be companies in healthcare or consumer-facing industries or even financial institutions. The battle will be between those who will harness the power of it and those who will suffer.

DM: To conclude, Carmine, what about the why and the why now?

CDF: I would say three things on the why now. First, diversification. In the US, given the dominance of tech, it’s very difficult to find effective diversification. Value offers one of them. The second point would be the circumstances. Everybody’s expecting the economy to slow down. Current valuations are too high. That’s why value should be in any investors’ toolkit to walk through these challenging times. And the third one is the opportunity. Going back to the AI question, when something is the only game in town, this is where attractive opportunities arise, companies with good businesses with attractive valuations.

DM: If I can summarise some of the key insights you shared with us, when we think about equity investing, we tend to say it’s all about earnings. But it matters what price you pay for those earnings, and that’s really where value investing comes in. You made a very good point that price earnings ratios was not always the best way to make that determination.

Well, Carmine, thank you very much for joining me.

CDF: Thank you, Daniel.

DM: That’s it for this week’s episode of Talking Heads. If you would like more information, please reach out to your BNP Paribas Asset Management contact or check out Viewpoint, our website for investment insights at viewpoint.bnpparibas.am.com. Viewpoint brings commentary and analysis in a variety of formats, from investment outlooks to asset allocation videos and podcasts to help investors make better informed decisions. You’ve been listening to the BNP Paribas Asset Management Talking Heads podcast with me, Daniel Morris, and Carmine De Franco, Head of Quantitative Equity. Please do join me next week. Until then, take care.