Contrarian approach seeks to exploit market’s short-termism
In European equities, employing a “straw hats in winter” strategy – when something is not in demand, it should be available at a lower price – can produce attractive returns.
- In recent decades, investors have opted to hold shares shorter and shorter
- Opportunities to exploit shares in out-of-favour companies and sectors
- Taking a longer-term stance to benefit from risk-on/risk-off swings
We believe opportunities can arise from the market’s short-termism. This focus on short-term momentum and events tends to create a lot of random market noise, partly as a result of some market participants’ remunerations being based on commissions from turnover.
In our approach, we seek to unearth the fundamental appeal of a company after removing shorter-term market considerations. Research has confirmed that over a longer-term holding period, earnings growth drive equity performance, not market valuations.
Accordingly, we focus our analysis on the key attributes of superior longer-term growth and earnings sustainability in quality companies, spending much time identifying what the market currently likes and dislikes and which areas it is abandoning or neglecting. If we are going to invest in a bank, we believe the best time to buy is when most investors are pursuing more favourable options elsewhere.
Exploiting shifts in fear and greed over three periods
A productive source of straw-hat-in-winter investments can be the swings in market sentiment between fear and greed, otherwise known as ‘risk-on/risk-off’ strategies.
- Risk off: Jan 2008 – March 2009: The defensive mind-set focused on capital preservation, favouring quality companies with strong balance sheets over leveraged cyclicals. Stocks with high-beta attributes traded at a substantial discount. Our contrarian picks included two cyclicals – Halma and Siemens.
- Risk on: April 2009 – April 2011: The market was chasing the recovery plays, so we switched our attention to low-beta characteristics. Our defensive quality plays included banking as an industry.
- Risk off: May 2011 – December 2012 The market focused on companies offering exposure outside Europe, and in particular, high emerging-market exposure. We redirected our research towards companies such as Mediaset Espana, being domestically and cyclically heavily exposed to the issues in the eurozone periphery, and concluded that consolidation in the Spanish TV industry should overpower any such issues.
We believe it is important not to lose sight of the wood for the trees!