As shoppers in the US, and increasingly elsewhere around the world, head to stores and online to try and unearth bargains this Black Friday, a number of investment managers outline areas of the market they believe are currently undervalued…
‘Cheap Korea on cusp of corporate revolution’
“For a long time, minority shareholders in Korea have been negatively impacted by an unhealthy closeness between chaebol-controlled conglomerates and the government. This has allowed the controlling shareholders of many operationally sound companies to mismanage balance sheets and expand into areas that are not in the best interests of minority shareholders. However, newly elected government officials are beginning to position themselves independently of the country’s most powerful families and are implementing reform to eliminate many of the shareholder unfriendly actions that have been prevalent in the country.
“We are bullish on the prospects for Korea and have an approximate 10% net long exposure to the country. Korea remains a cheap market and the prospect for continued corporate governance reform heightens our appeal towards the country.”
‘Rents on the rise in booming Berlin’
Rogier Quirijns, senior vice president and portfolio manager at Cohen & Steers
“Germany, the economic gravitational centre of the EU, is enjoying strong economic, population and job growth – thanks to a vibrant exports sector and attractive migration policies. German household formations are running at the highest levels since the boom years in the early 1990s following reunification. Nowhere is this more evident than in Berlin. While the public sector and tourism are playing central roles in Berlin’s revitalisation, the city is quickly becoming the Silicon Valley of Europe.
“Although residential supply is increasing in Germany, it has not been nearly enough to meet demand, particularly in Berlin. It is estimated 20,000 new housing units are needed each year to meet new and pent-up demand in the city. However, the market has supplied only half this amount annually in recent years, which is helping to drive rents higher. Quality office space in Berlin is also scarce, with strong job growth driving low vacancy rates and rising rents amid the creation of limited new supply. Berlin office take-up has set records in each of the last several years, but supply has met only a quarter of this demand.”
‘Seek countries less sensitive to rate hikes’
“A synchronised tightening move among major central banks could give developed market government bonds a volatile ride. Navigating this uncertain environment will require a smart approach, with specific positioning on the yield curve likely to take centre stage within portfolio construction.
“In addition to yield curve positioning, another way of navigating the current environment is to identify countries that are potentially less sensitive to a rising rate environment. Australia stands out in this regard. Although its domestic bond market is likely to react to a selloff in US treasuries, it should quickly revert to being driven by domestic fundamentals once the market settles. Israel also offers a potential refuge from interest rate volatility. With little sign of inflation in the country’s economy, the Bank of Israel is likely to remain on hold for the foreseeable future. However, the yield curve seems to be pricing an interest rate path similar to the one likely to be followed by the US.”
‘Tapping into India’s internal engine’
“India remains a strong domestic story, driven by long-term structural drivers of demographics and urbanisation. These factors lead us to primarily focus our investments on Indian-listed companies tapped into domestic demand. For example, India’s television market has been one of the biggest beneficiaries of the country’s growth in recent years and is forecast to continue growing healthily over the next few years – with subscription services yet to penetrate significantly.
“We recently purchased a position in Sun TV Networks, a stock we have been closely tracking for some time. Sun TV is south India’s largest broadcaster, with more than 30 channels across four languages. The greatest opportunity for the company is the push to digital TV access in the state of Tamil Nadu.”
‘Investing in the world’s new innovative hub’
Gary Greenberg, head of emerging markets at Hermes Investment Management
“For those of us in the West who grew up with the epithet ‘Made in China’ as shorthand for a cheap facsimile of the real thing, the concept of China as a hub of innovation is a challenging one. However, with government funding for research ramping up and patent awards rapidly outpacing the rest of the world, the facts do not lie.
“One such innovator is Alibaba. From its origins 18 years ago, it has grown to become the world’s largest retailer, while diversifying into media creation and cloud computing. Often described as the Asian Amazon, the company’s business model also replicates that of eBay. The business is reputed to generate more gross merchandise value than eBay and Amazon combined. Most businesses today follow the so-called 80/20 rule, where 80% of revenues come from 20% of clients. Alibaba wants to turn this model on its head, serving the 80% of people who do not have access to the global marketplace for 20% of the profit. By harnessing big data, this approach can make sense.”
‘Catalan crisis boosts Spanish housebuilder attractiveness’
“We have struggled to find ideas in Spain of late, not for a lack of interesting companies, but because the strong economic recovery has largely been reflected in valuations. However, we are invested in the housing recovery in Spain and the uncertainty caused by the Catalan crisis has provided an opportunity to add exposure to this trend.
“Spanish housing is an attractive long-term recovery theme and has recently become accessible via the listings of Neinor Homes and AEDAS Homes. Activity in the housing sector contracted very sharply after the financial crisis, but has begun to recover over the last couple of years. Housing demand is improving on the back of population growth, falling unemployment, low interest rates and better mortgage credit availability. At the same time, excess supply has been largely absorbed. The pre-2008 housing bubble led to an excess of stock throughout Spain after the crash, forcing down prices. While there remains considerable stock in some regions, this has tumbled in the larger cities like Madrid.”
‘The new spending patterns of UK consumers’
“It is important to recognise the power and dominance of consumer spending within the UK economy and the potential problems this causes if consumer confidence takes a knock over Brexit. However, from an investment perspective, we are finding it is not necessarily a case of ‘if’ consumers are spending, but ‘how’. Despite unemployment rates being at historic lows, wage growth in the UK is faltering. Spending power is being tested by 3% inflation, as annual wage growth is about 2%. While some of these pressures should ease going forward, household budgets are likely to remain under pressure.
“It is likely people will spend less on big ticket items, such as cars or furniture, and switch focus to the little luxuries in life – going out for coffee or ordering a takeaway. This is why we are attracted to a company like Hotel Chocolat. Consumers are allocating rationally into the things they can afford to improve their quality of life – while deferring larger spends for better times.”