George Evans, CFA
Senior Vice President and Portfolio Manager
OFI Global Asset Management
P&I: Why is now a good time to invest in equities? Are current valuations attractive?
George Evans: Valuations of equities look very attractive overall and very attractive in particular areas. While markets are up quite aggressively since the lows of early 2009, it does not mean that valuations are high.
We take a long-term view, and a couple of points appeal to us. The first thing is the relative valuation of equities to bonds. Clearly we're at the end of a 30-year bull market in bonds. Yields are likely to stay low, reflecting the lower potential growth rate of the developed world. So in the context of sustainably low interest rates, price-to-earnings ratios could be significantly higher. When we analyze cash flow, return on capital and cost of capital, we think that higher prices for a significant chunk of the market are still justifiable, despite the fairly high moves of certain stocks in the past four years.
Also, cyclically adjusted price-earnings ratios are good indicators of market potential over a three plus–year period. Particularly in Europe, there are markets at levels similar to those in 1982. The low valuations reflect a great deal of pessimism that often marks a great buying opportunity if one has a long-term perspective.
P&I: How else would you compare the investment climate now to that in 1982?
George Evans: History doesn't repeat, but it rhymes. From 1972 to 1982, we had a decade quite similar to 2002 to 2012. Investor confidence in equities was pummeled and valuations were very low, providing a platform for a subsequent multi-year bull market. The '70s was an era of global and geopolitical instability. Commodity prices, particularly oil, were high. There was a lot of labor unrest through the developed world and an existential fear in the U.S. that its place as the number one economy was threatened by a rising Asian power, Japan. In the last 10 years the fear has been another rising Asian power, which is China. Those events led to a high level of volatility in the market. And that led to high fear of loss. Over the last six years, the overwhelming inflows to fixed income and the overwhelming outflows from equities reflects a very low level of confidence in equities. As such, this is a good time to deploy capital in many parts of the equity market.
P&I: Tell us about your 'MANTRA' theme-based approach to investing.
George Evans: 'MANTRA' is an acronym that stands for Mass Affluence, New Technology, Restructuring and Aging. These are long-term structural themes, in place for many decades. There are industries—and companies within those industries—that can grow sustainably faster over a five-, 10- or 15-year period than other parts of the economy. The theme approach captures those.
Mass affluence has recently been driven by the emerging consumer in the developing world. Since 1990, the growth phenomenon of emerging markets has made several billion people economically active, and this is a huge opportunity for well positioned global companies that make the things that people want. You do not necessarily have to find a local player to take advantage of this. The emerging market consumer has demonstrated a healthy preference for the products and services of large multinational Western companies, whether for food, personal care, beverages or luxury goods. The strength of a brand in emerging markets is very strong, and for many Western-based companies, the opportunities out there are significant, and they are going to remain so for many years to come.
As economies become more affluent and service oriented, profitable niches are created. For example, we have found some logistics companies with powerful business models, under-penetrated market positions and the ability to grow over time. Another great variation on the theme is to replicate business models that emerge in the U.S. For example, drug store chains and fast food franchisees have been stellar performers in some markets.
In new technology, there are companies that face substantial growth opportunities on a global basis, no matter where they're headquartered. The rate at which data is generated practically doubles in any given year. Broadly there are advantaged companies that deliver, store, and manage data. Deliver it: telecommunications, telecommunications equipment, satellites and cable systems. Store it: We have companies that are directly or one degree of separation related to the big data warehouses, Web hosting services, and the technologies on which data is stored. Manage it: a host of software opportunities. This has been growing relentlessly and will continue to do so. And the economy's slow growth has not tamped down the potential.
The restructuring part is stock specific. Restructuring a company provides a great release of value. There are wholesale industrial restructuring opportunities that can create new sector leaders as well. We prefer them within our themes, but just being alerted sharpens our radar.
As for aging, we know the number of people who will be 65 years old in 20 years, and it will be substantially bigger. Twenty years ago, this meant pharmaceutical stocks. But we prefer to invest in improving the quality of life, ultimately a consumer discretionary spend. We own several companies in the eye care business—sticker shock over lenses and frames knows no bounds—so we like the profitability. We have a number of companies that are in hearing aids also—things like that.
P&I: How do the themes change? What is emerging?
George Evans: These themes are long term and don't change much, but there is evolution within them. One interesting new technology subtheme is the shale gas revolution. It's really a combination of two technologies: fracking, which has been around, and horizontal drilling, which has unlocked vast reserves and revolutionized the global energy landscape.
But having identified a secular growth trend doesn't mean you can make money. For example, in terms of shale gas, we're not interested in companies selling the gas. It's a commodity. We're interested in the companies that provide technology, getting a lock on the value chain to exploit the growth.
P&I: Tell us about being 'benchmark agnostic.'
George Evans: We're long-term investors, and an index is just a wrong place to start. We start with the themes that are interesting and the companies that have more robust fundamentals than the average. We look only at those with a much higher probability of long-term sustainable growth. An index is really a scorecard up to the close yesterday of a whole load of historical phenomena. It does not indicate the probability of what companies can do moving forward. The largest components of most indexes are large-cap companies. A very large company is unlikely to undergo sustainable above-average growth. It got to be a big cap by growing very fast in the past. We want to hitch our wagon to the future.
P&I: What are your thoughts on some of the world's key markets.
George Evans: Japan has deployed some pretty radical policies. Hopefully it will kick start the world's third largest economy back into a sustained growth state—it's been 20 years. On a micro-basis, most of the immediate beneficiaries of the lower yen and other policies were re-priced almost immediately. Japan has companies that fit our criteria of having a great product or service, global appeal and sound management. In the past, those companies have been less abundant in Japan than in the U.S. or Europe.
China is clearly very powerful. We're invested in the phenomenon of Chinese growth and consumerism largely through our holdings in Europe, where they make better products and have stronger brand recognition.
There will be opportunities in emerging markets, but selectively. The last couple of years have revealed weaknesses in large markets. For example, India has had well documented problems reflective of much slower growth, slowing investment and a falling currency. Similarly, Brazil is slowing from falling commodity prices, and the lack of cash will test its resilience.
Ultimately, with macroeconomic growth or not, the global appetite for luxury goods, branded spirits and people's willingness to spend more on devices that generate a lot of data have been growth opportunities that have existed despite the zigs and zags of the underlying economy.
George Evans: OFI Global Asset Management (“OFI Global”) consists of OppenheimerFunds, Inc. and certain of its advisory subsidiaries, including OFI Global Asset Management, Inc., OFI Global Institutional Inc., OFI SteelPath Inc. and OFI Global Trust Company. The firm offers a full range of investment solutions across equity, fixed income and alternative asset classes. These views herein represent the opinions of OFI Global Asset Management (“OFI Global”) and are not intended as investment advice or to predict or depict the performance of any investment. Our investment strategies may be offered through various investment products that are advised or managed by one or more investment advisory entities comprising OFI Global. Special Risks: Portfolio investments are subject to market risk and volatility.
These views are as of September 1, 2013 and are subject to change based on subsequent developments. OFI Global disclaims any responsibility to update such views. No forecasts can be guaranteed. The material contained herein is not intended to provide, and should not be relied on for, investment, accounting, legal or tax advice. Further, this material does not constitute a recommendation to buy, sell or hold any security. No offer or solicitation for the sale of any security or financial instrument is made hereby.
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