Market Musings 270424: Time To Focus On Deep Value?

27th Apr by Edmund Shing

7 comments 1880 reads

Market Musings 270424:

Time to focus on Deep Value?

Podcast: Ramping up investment in electricity transmission infrastructure
Bonus podcast: Ther Meb Faber show - GMO’s Catherine LeGraw – Capitalizing on Global Asset Allocation in 2024
Global stock markets rebounded last week: Euro STOXX 50 and S&P 500 now only 2%-3% off end-March highs. Nikkei 225 has corrected more, but is also bouncing;
Despite the surge in long-term interest rates (bond yields) since the end of 2023;
High risk assets: Nasdaq 100 index rebounds post strong quarterly results from Microsoft, Google, but Bitcoin continues to mark time around $63,000;
Precious metals: Setback for gold and silver after a breakneck run since March - but breakouts to new highs are intact
Deep value is a very attractive long-term investing opportunity now, according to GMO

1. Major stock indices rebounded last week, Euro STOXX 50 only 2% off recent high

Source: tradingview.com

2. In spite of the pressure from rising long-term interest rates

Source: tradingview.com

3. High-risk assets: Mega-cap tech rebounds on the back from strong quarterly results at Microsoft, Google
but Bitcoin marks time $10,000 below the recent all-time high

Source: tradingview.com

4. Setback for gold and silver after a breakneck run since March - but breakouts to new highs are intact

Source: tradingview.com

5. GMO (Grantham, Mayo and van Otterloo - US value fund managers) are big fans of deep value inside and outside the US

Despite strong gains in equity markets last year and year-to-date as well as indexes sitting at all-time highs, we are extremely excited about the investing landscape from an asset allocation perspective. An abundance of cheap assets underpins this enthusiasm from an absolute return standpoint, while appealing valuation spreads within asset classes present us with the best relative asset allocation opportunity we’ve seen in 35 years.

Source: GMO

GMO argue that it is time to buy Deep Value in global stocks

First of all, a disclaimer. Since GMO is a US value fund manager, they are clearly talking their own book when arguing the case for investment in value stocks.

However, note their long-term (7-year) expected real return forecasts…

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Epitychia

28th Apr

Interesting read, thank you.

andrew guppy

Thank you for the podcast ideas. Would be helpful to have a list of the etfs you mentioned as content text as they do in the Twin Petes podcast rather than having to playback the recording. Just an idea.

ShoeShineBoy

Always a good read at the weekend Ed, thanks very much. Especially like the charts and graphs. Value investing suits me as it involves little buying and selling. AVI Global Trust (LON:AGT), is a good option, it's a closed ended investment trust that focuses on family run companies, Japanese small caps and private equity trusts. Some good podcast interviews with the manager, Joe Bauernfreund on the IC and also MoneyWeek. Links over on the Investment Trust thread set up by Charles Mitchell.

topvest

Yes a good read Ed. A pivot to value this Summer is probably a good call as I feel the AI boom is now fully priced in and is near or already at the top so is highly exposed to any new adverse development - take your pick from US election, geopolitics, continued increases in the long end of the yield curve, sticky inflation or a black swan event. Is sell in May and stay away going to be relevant in 2024?

I like AVI Global Trust (LON:AGT) as well ShoeShineBoy. Its a hold forever investment trust for me. It has a well proven and differentiated approach that stands the test of time. Not buying more at the moment but a strong hold for me.

Hi topvest,

this link is to the most recent IC interview with the AVI Global Trust (LON:AGT) trust manager. Joe Bauernfreund makes the point that there is no point buying something cheap if it quickly loses it's value. Whatever the value is, has to remain in place in order to benefit from owning the asset.

https://tinyurl.com/398s5c3n

dodge1664

I've been reading articles by Jeremy Grantham and others at GMO for about 15 years, and he seems to a clever chap. Yet whenever I check, GMO funds seems to have underperformed the market over 10 years. Perhaps its due to the dominance of the Mag 7 stocks. Or perhaps you'd just be better off with an index tracker.

Mark Carter

30th Apr

My favourite chart is the Wilshire US large-cap growth vs value chart:

https://www.longtermtrends.net...

You can see that in 2000 the chart reached an all-time high, demonstrating that growth was egregiously overvalued.

The typical value seems to be about 1.

At around 2007 the chart reached an all-time low. Interpretation: growth had been pounded and value shares did well.

So around 2007 growth was at its cheapest valuations relative to value. This gave an enormous tailwind for growth shares to do well. And so it happened.

We now find ourselves at the opposite extreme, with growth shares at their highest relative valuation in more than 20 years, and at their high end.

The stage is now set for growth to do badly, and value to do well. It feels a lot like the late 90's, where the tech stocks soared but the value stocks soured.

It's worth pointing out that these reversals can take awhile.

What's interesting is that we've seen some whipsawing from 2020, which we didn't see in 2000. From 2020 growth shares raced ahead, but then reversed gear in late 2021. By late 2022, growth vs value was evenly valued. You'll notice that some high-profile funds like Fundsmith and Scottish Mortgage Investment Trust (LON:SMT) had a great run and then underperformed.

From late 2022 the markets regained their appetite for growth again, as amply demonstrated by the Mag 7.

The Mag 7 certainly seem very volatile at the moment, maybe suggesting that the market is uncertain as to "where next". AAPL is down year to date, TSLA has bombed; although GOOG and META are up, and NVDA is a tearaway success.

Market Musings 270424: Time to focus on Deep Value?