The monthly Corion Report highlights the whip-sawing given to investors who, this year, decided to listen to the old adage to ‘sell in May and go away’. In this podcast, Corion’s David Bacher looks back at the critical numbers of the highly volatile month and reveals to BizNews founder Alec Hogg where he now sees the best value.
On asset managers at Corion handling equities that continue to slide
Our clients at Corion expect us to take a long-term view, so we go back to following our investment principles, which is very much valuation based and, more often than not, when the markets are down – I think 20 May, the US market was down more than 21% in bear market territory – those are the times where you often find opportunity. And you need to ignore the rhetoric out there, the negativity, and look at it from a long-term valuation perspective. We certainly were nibbling mid-month. We weren’t rushing in because certain parts of the equities can be at higher valuations, but it presents opportunities and you need to be able to take advantage of those opportunities.
On how stocks performed in May
If I look at the managers who performed and didn’t perform, it’s pretty much a similar story to the last few months. It is those managers who had conviction and were generally biased in managers that were at the top of the ranking tables. After 10 years of being the laughing stock of other investment strategies, it’s a ‘look who’s laughing now’ type of thing at the moment, because they really are doing well; the value managers and those who stuck to their principles and investment beliefs and stayed the full course of time are starting to reap the rewards.
On tech stocks down by 46%
We made reference to the S&P biotech index, so that is definitely the coal face of risky assets, assets that are priced for future earnings. When you have a sell-off and potential for rising interest, of which risk is priced, generally those are the assets that come off the hardest. But as you said, a 46% decline is massive. We had a look at that this morning in our investment meeting and a lot of those companies in that index are actually trading less than their cash value. So yes, the risk has gone up. A lot of those companies are potentially not going to get the future earnings that investors expected. But when you have such a fall and you have these companies with significant cash in their balance sheet, the question we ask ourselves is whether this is not the time to be nibbling at these counters.
On a 46% downfall in stocks being a potential buying opportunity
Because these companies burn a lot of cash as they’re deploying that into research, etc. you can find a situation that we are in at the moment; if you look at their market value – the price at which you can buy and sell the companies on the stock market – and you compare it to the cash to hand on their balance sheet, you are getting a discount for some of these shares. So, the market is saying: well, yes, we know that. Is it a buying opportunity, will this R&D and research and potential future earnings play out, or will it just burn the cash in the company’s present valuations? It is, if you look back in history, a period where I don’t think the amount of companies in this index have traded at such low valuations. So, we are thinking that the 46% decline is a buying opportunity.
On the huge sell-off in stocks in the US
Yes, the drawdown has been significant. If you look at the Nasdaq, the S&P, there have been some sharp reversals. The drawdown is probably 13%, 14% or 15%. But if you look at the Nasdaq, for example, over the last five years, it has still given you a compound return of 20%. So, even with the drawdown – you take a bit of a long-term perspective – there has been asset classes that have performed very well. So, what does that mean? Where are we now? We must still look at valuations and the prospect of future earnings. We think the riskier asset classes – the asset classes that have been bought for future growth prospects – are still on the expensive side. We are definitely seeing opportunities in the market, but probably not in the growth tech part of the market.
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