Eastspring’s equity CIO looks at stock underlying value in emerging markets
Kevin Gibson is chief investment officer, equity at Eastspring Investments.
Global uncertainty in recent years has put a premium on investments that offer quality and certainty. That premium, we believe, is far too high and opens opportunities for a focus on underlying value.
In short, too many investors have paid too little attention – no attention, in some cases – to the prices they have been charged, with the predictable result that “quality” has become very expensive.
This is true of equity markets overall, with those in advanced economies carrying much higher price tags than those in emerging markets, and is true also of individual equities with “quality names” in relation to the price of other stocks in their market.
None of this is especially surprising to those of us whose search for value starts with the belief that behavioural biases and changes in expectations are able to push share prices away from their underlying value, either in terms of undervaluing them or of creating an excessive premium.
Such mis-pricing, obviously, creates an opening for investors not caught up in the outbreak of fear or greed that has put prices out of kilter with underlying value. But taking advantage of such opportunities depends on being able to gauge accurately what that value really is.
How best to do this?
In our view, the key is to look to a longer time horizon in order to focus on sustainable earnings. These earnings, we believe, represent the best way to judge the underlying value that is the anchor of our investment approach and allows us to identify those “outliers” whose price is markedly adrift from this intrinsic value.
Our scrutiny is disciplined and uses a valuation model that is employed across the company. This gives us the ability both to identify mis-pricing and to take advantage of it. This model also helps to limit the danger that our own behavioural biases could affect our stock selection, as does our culture of internal debate, in which seasoned investors are encouraged to challenge one another to test their convictions.
This in turn means that our portfolios are more than simply a collection of good ideas, vital though such good ideas may be. Stocks are selected on the basis of those convictions that withstand scrutiny and have significant upside potential. Unintended risks are identified and managed.