Investors are facing many headwinds currently, but as our sister company, Orbis, explains in this article, it’s important to stay grounded. Below Orbis offers five key points for investors to navigate tricky markets. This article was written on 26 April 2023. 

 

After a choppy start to the year, investors should brace themselves for more to come. If you thought 2022 was tricky, we believe it’s just the beginning of a cycle that’s set to shake up markets for years to come. With stocks falling in almost every sector and bonds failing to balance them out, investors and allocators have every right to feel gloomy about future portfolio returns. But as active, contrarian, value-orientated investors, we don’t have to own the whole market—just select opportunities within it—and we’ve rarely been this excited.

Following a recent presentation by Orbis’ Dan Brocklebank at the Pension Bridge Conference in San Francisco, we’ve assembled five key takeaways that investors should bear in mind when making their decisions.

 

1. Forget-me-not

Every boom-bust cycle is different, but they all follow a broadly similar pattern. Viewing the current environment through a truly long-term lens allows investors to place it in proper context and learn patterns and lessons from the past. More than 30 years of contrarian investing has taught us that good stock picking results can make an enormous difference when equity markets are generally weak. This means investors who are willing to cut through the short-term noise and focus on long-term fundamentals can be richly rewarded.

2. The bubble is still inflated!

2022 was brutal for many investors, but the bubbly excesses of the previous decade have only just started to deflate, and valuation gaps remain astonishingly wide. It might be a difficult fact to swallow but markets are a long way from completing the post-bubble deflation process that has been typical of history. Yes, stockmarkets dropped 18%, but that came on the heels of a 22% rise in 2021. Viewed that way, 2022 barely unwound the broad excess of a single bubbly year, let alone the accumulated excesses of the previous ten. Why is that so worrying for passive investors? Because the US market (which accounts for around two-thirds of the World Index) remains more richly valued today than it was at the peak of the tech bubble, even after last year’s declines!

3. Mind the gap

Most investors think the market cycle is simply asset prices in general going up and down. But that misses something concurrent, and equally crucial: the cycle in valuation gaps. When money is plentiful, investors become more willing to pay inflated prices for companies offering big profits in the distant future, and the valuations of those stocks tend to bubble up. But not every stock gets to join the bubble. Many companies, often those that are profitable but a bit boring, are left to languish. When liquidity rises, the valuation gap between cheaply and richly priced stocks gets wider and wider over time—meaning that a number of interesting companies that are not part of the current bubble can be overlooked and unloved. Taking a long view of history, it’s clear that valuation gaps today remain extraordinarily wide and have a long way, and potentially years, to go to get back to more normal levels. But this is why it’s exciting.

4. Exploit the opportunity

As valuation gaps close, richly priced shares could suffer, but cheaper shares could actually thrive, providing some exceptional opportunities for astute value-orientated investors. With valuation gaps today still wider than at the peak of the tech bubble, the value we are finding in areas like critical infrastructure, energy & materials, quality cyclicals, and selected banks, makes us very excited about the relative returns of the Orbis strategies. Indeed, our bottom-up, contrarian research has identified businesses that we believe are better positioned for the coming environment trading at 30-40% discounts to the average global stock. Investors need to combine the benefits of a long-term view with a willingness to look beyond the crowd to find these hidden gems.

5. Revenge of the stock picker

The prevalence and extremity of asset mispricing over recent years is largely without historic parallel. It usually takes a long time and a lot of pain for bubbles to deflate and valuations to return to less exuberant levels, and whilst the recent “Everything Bubble”—one of the biggest in living memory—has begun to deflate, a return to less exuberant valuations will doubtless require more time and more pain. An analysis of today’s markets in the context of historic market cycles reveals continued risks for broad asset classes, but exceptional opportunities for savvy value-orientated contrarian investors willing to think and invest differently. While the past 10 years were great for markets and tough for stockpickers, the next 10 years could very well be great for stockpickers but tough for markets.

 

Financial advisers can contact their local Business Development Manager to learn more about the Orbis Global Equity Fund.