universal spotlight: The findings of Graham and Dodd date back to the 1930s and were based on observations of the US equity market. Almost one hundred years later, how does their work provide insights for global equity investments?
Michael Keppler: In 1934, Graham and Dodd published "Security Analysis: Principles and Techniques", which laid the foundations for securities analysis. According to Warren Buffett, the sub-title indicates that the essential arguments are still going to be valid in 100 year’s time – otherwise they would not be principles. Value investing principles are not limited to securities, but can also be applied to other assets, such as real estate or farmland in Argentina. They are universally applicable decision-making criteria for any prudent business person with clear preferences and as such timeless and generic. However, our work is also based on extensive research into the international capital markets over several decades, which has been published in a variety of professional journals. Our empirical data shows that Graham and Dodd’s findings with respect to the US capital markets can be extended to other markets as well.
Global economic growth is slowing, while uncertainty is growing on the equity markets in light of a multitude of political and economic problems. How does that affect your investment approach, which does not rely on forecasts?
The economy and interest rates have limited impact on our investment decisions. Concerns about interest rates or economic growth often push prices down, which enables us to buy equities cheap. We often make use of bullish periods to offload overpriced stocks. As for forecasts, we don’t use them because we tend to think that they reveal more about the forecaster than about the future. We prefer to look at proven results – hard facts rather than fake news and forecasts. In that we are in good company: Warren Buffett doesn’t have much time for unreliable earnings targets and expectations either. He tends to look at previous-year’s balance sheets instead.
Warren Buffett doesn’t have much time for unreliable earnings targets and expectations either.Michael Keppler
Which industrialised countries, regions or even specific sectors do you think have potential?
In the Far East, we currently like the equity markets of Australia, Hong Kong, Japan and Singapore. In Europe, the Global Advantage Funds – Major Markets High Value (ISIN LU0044747169) is mainly invested in Germany, the United Kingdom, Italy, Norway, Austria and Spain. Prices are very low in all these countries, both in absolute terms and compared to historical averages. In the US, just under 10 percent of our fund portfolio is invested in Warren Buffett’s Berkshire Hathaway. We tend to keep our investments in each country sector- and industry-neutral in order to reduce macro risk. The Global Advantage – Major Markets High Value is currently undervalued by more than one-third compared with the MSCI World Index.
What are your favourite emerging markets?
If we use traditional valuation metrics, emerging market equities are currently over 20 percent cheaper than their counterparts in industrialised countries. At the moment, our Global Advantage Funds – Emerging Markets High Value (ISIN LU0047906267) , which invests in a selection of the best-value emerging markets, offers investors a discount of 22 percent against the MSCI Emerging Markets index and represents a great investment opportunity. We recommend that a global equity portfolio contains at least 10 percent – but ideally 15 to 20 percent – of value equities from emerging markets. Our current favorites are Brazil, Chile, China, Colombia, Czech Republic, Malaysia, Poland, Russia, South Korea, Taiwan and Turkey.
How do you expect the equity markets to develop in the next few years? Are they not running out of steam after ten years of growth in the wake of the financial crisis?
As a matter of principle, we do not make predictions. However, we do form an opinion as to how the equity markets might perform over the next three to five years based on absolute and relative valuations. Our assumptions are based on empirical data from the last 50 years. Between 1970 and the mid-1980s, equity markets were dominated by high inflation, high interest rates and low valuations. Subsequently interest rates fell, while valuations and share prices rose, and we have seen low inflation and extremely low interest rates ever since. In that context, we anticipate annual total returns (price gains plus dividends) to come in at around six percent for industrialised markets and roughly eight percent for emerging markets stocks. Like Warren Buffett, we do not rely on earnings forecasts and expectations, but prefer to base investment decisions on facts rather than fiction.
Author: Michael Keppler and Yvonne Raßbach
Date of issue: 12/16/2019
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