07 Feb 2024
The economic impacts of deglobalisation, normalizing interest rates and the return of inflationary pressures are all factors which could provide an improving outlook for value investors, says Newton Investment Management1 deputy head of equity income and portfolio manager John Bailer.
Economic times are changing. After a post global financial crisis (GFC) period that saw quantitative easing (QE), near zero interest rates and so-called ‘free money’, inflation is back - with markets reacting to a raft of recent central bank interest rate hikes.
For Newton’s John Bailer, this shift - amid some recent signs of a return to more normal inflation and interest rates - could signal good news for value investors.
“Looking back at the pre-pandemic, post GFC era, we felt interest rates went through a period where they were unsustainably low. In our view that period was not normal. It is actually exceedingly rare to see such sustained zero or close to zero interest rate levels in markets,” he says.
As interest rates normalise, Bailer says this era of so-called “free money” - which suited growth investment - is drawing to a close. Instead, he believes markets are entering a phase where a value approach could generate increasingly attractive returns for investors.
“After a decade of growth outperforming value, we are seeing some incredible opportunities start to emerge in the value area of the market. Increasingly, we believe markets are going to reward companies with attractive valuations, good dividend yielding potential and robust growth prospects,” he adds.
Bailer pinpoints specific emerging areas of opportunity in US equities, with the energy sector, medical device manufacturing companies and financials benefiting from wider secular shifts in the market and with select companies offering increasingly attractive dividends.
Describing trends driving US dividend pay-outs, including shifting demographics, he adds: “We believe the US is unique, in terms of world markets. It has fairly low pay-out ratios compared to other markets in the rest of the world so there is strong potential for dividend growth.
“We already see signs US pay-out ratios are starting to move up again. One of the reasons we think dividends will go higher is people are living much longer in the US and demanding more income from their stocks as they get older.”
At a macroeconomic level, Bailer believes ongoing deglobalisation could also provide a healthy tailwind for US companies which can benefit from reshoring and the support of initiatives such as the Biden administration-backed US Inflation Reduction Act (IRA).
“Deglobalisation is one of the biggest changes we have seen recently. The introduction of the Infrastructure Investment and Jobs Act (IIJA), IRA, CHIPS and Science Act and other infrastructure measures will encourage more investment – especially manufacturing investment – into the US economy,” he adds.
“The main driver behind globalisation was that it made it cheaper to manufacture some goods and products, such as semiconductor chips, outside the US. But that is totally changing. For security and other economic reasons, Americans now want to manufacture more products in the US and we are steadily creating the infrastructure to do this.”
Despite the new opportunities created by the recent rise in interest rates, ongoing inflationary pressures and the march to deglobalisation, Bailer says investors must still be cautious in their stock selection.
“As the tide of ‘free money’ recedes and markets readjust, it pays investors to be careful about the type of businesses and companies they own in the market. Strong balance sheets can be a major plus in an inflationary environment where cash holds greater value. In contrast, highly leveraged companies will attract greater scrutiny in an environment where their business models could become challenged,” he adds.
With US elections looming and a range of unpredictable geopolitical factors still spooking some investors, Bailer believes taking a consistent approach to value investment is key to building reliable performance over the longer term.
“If anybody tells you they know exactly what is going to happen in the future don’t believe them,” he says. “The future is unpredictable and the only way you can have consistent investment performance over time is to follow a time-tested investment approach. In our view, good process is key.”
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2 Investment Managers are appointed by BNY Mellon Investment Management EMEA Limited (BNYMIM EMEA), BNY Mellon Fund Managers Limited (BNYMFM), BNY Mellon Fund Management (Luxembourg) S.A. (BNY MFML) or affiliated fund operating companies to undertake portfolio management activities in relation to contracts for products and services entered into by clients with BNYMIM EMEA, BNY MFML or the BNY Mellon funds.
For Professional Clients only. Any views and opinions are those of the interviewee, unless otherwise noted. This is not investment research or a research recommendation for regulatory purposes.
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