European equities: do not take a binary approach

Value has broadly outperformed growth so far in 2022. How do you expect this to unfold for rest of the year?

I think we’re still in the foothills of value outperforming growth, but I think its still early. That being said, I think we’ve got to be a bit careful. It’s dead easy in this business to be binary and value/growth debate is part of that. And I don’t think all value has been outperforming and nor will it outperform. For example, the favourite poster child sector for value historically was banks. I don’t think you’re going to get too much durable outperformance from banks, historically seen as value versus the rest of the market. So, I think again it’s in the eye of the beholder. You’ve got to be choosy even in value.

But I think growth is broken. I felt would break. I think its broken. Growth stocks are broken. And what broke them? You had a change in the price of money. You had a change in the cost of money. It actually went from ‘free’ to costing something and that has broken hypergrowth – all those not-for-profit so-called digital disrupters. It’s sheer nonsense.

But the less nonsense part of growth is also broken. And what I mean by that is long periods of outperformance has broken, that trend has broken.

Has the current macro backdrop changed your investment approach?

There is nothing that has changed in 2022 in a philosophical sense in terms of we’ll always be blend, we’ll always pay attention to valuation. But we have made some changes because of course you’ve had a couple of events happening in 2022. The tragedy in Ukraine, which continues to unfold. We’ve had to respond to that. We haven’t had to respond to the onset of inflation because it is actually something we said just over two years ago is likely with the onset of the pandemic and the geopolitical response to the pandemic.

So, the changes we have made have really been taking down our consumer discretionary exposure because that consumer is squeezed. And I think the squeeze is going to get worse before it gets better in terms of energy and other bills. Food – I think that there is a big issue coming in terms of food price inflation aggravated by events in Ukraine. So, I think that squeezed consumer, I would imagine is likely to go for the revenge purchase and the revenge purchasing is moving from clothing – you’re seeing profit warnings now coming from clothing retailers. So, that kind of revenge purchase as we were all unleashed from our house imprisonment called lockdown, another insane move by so-called leaders [in my view]. That is going to move and is moving as we speak to leisure and travel. I think once we get to the autumn the consumer is going to be faced with a reality check. So, we’ve dialled down our consumer discretionary exposure in the first half of 2022.

I am concerned about the pressures from the energy markets on industrials so we are going to have to be even more choosy on industrials.

I think we’re okay structurally in terms the whole growth versus value thing. But I think two things are going to do their work – and do their worst on financial assets and that is the bear is here and the bear has more work to do. And inflation has more work to do. And both are going to be damaging.

Are you finding opportunities in the environmental, social, governance (ESG) space?

Well, I’ve felt for some time that the asset management industry’s response to ESG has been wrong and cynical. Cynical because it has been geared towards asset gathering. A whole bunch of funds have been labelled sustainable and it wasn’t too popular to say it some time ago and I think it is getting a bit more traction now. I think people’s eyes are opening to the ESG bonanza; and the cynicism of the asset management industry in labelling funds sustainable and is going after asset gathering, that has in my view (and I said it at the time) aggravated a capital misallocation.

We’re undergoing a capital cycle here. Cyclicality applies to everything in life, including capital. Capital flooded into already expensive areas, tech for example. This is why the bear has more work to do in tech, in the Nasdaq. That flood of venture capital, easy money, free money, was bad enough, but it was aggravated by the ESG movement.

So, I always wanted to take the other side of that. And the opportunities have been where capital has not been forthcoming. That’s your opportunity. Go where capital is starved, or go to industries or companies that have been starved of capital because if something is scarce, it’ll be bid up in price. Energy, resources, agriculture – I think its game on there. I think its game off and keep heading to the exits in tech.

Value has broadly outperformed growth so far in 2022. How do you expect this to unfold for rest of the year?

I think we’re still in the foothills of value outperforming growth, but I think its still early. That being said, I think we’ve got to be a bit careful. It’s dead easy in this business to be binary and value/growth debate is part of that. And I don’t think all value has been outperforming and nor will it outperform. For example, the favourite poster child sector for value historically was banks. I don’t think you’re going to get too much durable outperformance from banks, historically seen as value versus the rest of the market. So, I think again it’s in the eye of the beholder. You’ve got to be choosy even in value.

But I think growth is broken. I felt would break. I think its broken. Growth stocks are broken. And what broke them? You had a change in the price of money. You had a change in the cost of money. It actually went from ‘free’ to costing something and that has broken hypergrowth – all those not-for-profit so-called digital disrupters. It’s sheer nonsense.

But the less nonsense part of growth is also broken. And what I mean by that is long periods of outperformance has broken, that trend has broken.

Has the current macro backdrop changed your investment approach?

There is nothing that has changed in 2022 in a philosophical sense in terms of we’ll always be blend, we’ll always pay attention to valuation. But we have made some changes because of course you’ve had a couple of events happening in 2022. The tragedy in Ukraine, which continues to unfold. We’ve had to respond to that. We haven’t had to respond to the onset of inflation because it is actually something we said just over two years ago is likely with the onset of the pandemic and the geopolitical response to the pandemic.

So, the changes we have made have really been taking down our consumer discretionary exposure because that consumer is squeezed. And I think the squeeze is going to get worse before it gets better in terms of energy and other bills. Food – I think that there is a big issue coming in terms of food price inflation aggravated by events in Ukraine. So, I think that squeezed consumer, I would imagine is likely to go for the revenge purchase and the revenge purchasing is moving from clothing – you’re seeing profit warnings now coming from clothing retailers. So, that kind of revenge purchase as we were all unleashed from our house imprisonment called lockdown, another insane move by so-called leaders [in my view]. That is going to move and is moving as we speak to leisure and travel. I think once we get to the autumn the consumer is going to be faced with a reality check. So, we’ve dialled down our consumer discretionary exposure in the first half of 2022.

I am concerned about the pressures from the energy markets on industrials so we are going to have to be even more choosy on industrials.

I think we’re okay structurally in terms the whole growth versus value thing. But I think two things are going to do their work – and do their worst on financial assets and that is the bear is here and the bear has more work to do. And inflation has more work to do. And both are going to be damaging.

Are you finding opportunities in the environmental, social, governance (ESG) space?

Well, I’ve felt for some time that the asset management industry’s response to ESG has been wrong and cynical. Cynical because it has been geared towards asset gathering. A whole bunch of funds have been labelled sustainable and it wasn’t too popular to say it some time ago and I think it is getting a bit more traction now. I think people’s eyes are opening to the ESG bonanza; and the cynicism of the asset management industry in labelling funds sustainable and is going after asset gathering, that has in my view (and I said it at the time) aggravated a capital misallocation.

We’re undergoing a capital cycle here. Cyclicality applies to everything in life, including capital. Capital flooded into already expensive areas, tech for example. This is why the bear has more work to do in tech, in the Nasdaq. That flood of venture capital, easy money, free money, was bad enough, but it was aggravated by the ESG movement.

So, I always wanted to take the other side of that. And the opportunities have been where capital has not been forthcoming. That’s your opportunity. Go where capital is starved, or go to industries or companies that have been starved of capital because if something is scarce, it’ll be bid up in price. Energy, resources, agriculture – I think its game on there. I think its game off and keep heading to the exits in tech.