How to be a contrarian investor

2012-01-21 08:34

Piet Viljoen of asset management firm RE:CM says it is time to ignore the hype of emerging markets and so-called “defensive stocks” and invest in out-of-favour assets.

While emerging markets continued to attract investor attention last year due to their high economic growth rates and ongoing concerns in Europe and the US, there is little value to be had in equity markets in these regions.

We struggled to find value in Africa, China or most other emerging markets during 2011 and have thus very little exposure to these regions.

The perception of emerging markets as investment safe havens has been established by the good performance of these markets over the past 10 years, and has nothing to do with their prospective attractiveness.

Emerging equities were cheap 10 years ago, and have now become expensive at nearly three times their previous valuation. This increase in valuation resulted in the good historical returns but for such returns to re-occur over the next 10 years, these markets will have to go from very expensive levels to extremely expensive levels.

We now find large cap US-based companies like Wellpoint, Microsoft and Dell, as well as some listed UK companies and some in Japan very attractive.

We are therefore increasing our commitment in Japan significantly, investing in companies like Hammamatsu, FamilyMart and Tokyo Gas.

We are also starting to find value in Europe as things get worse in the region.

However, our funds exposure to this region is still fairly limited, as the potential dissolving of the European Union creates significant risks, and it is not yet clear that investors are being paid for taking those risks.

Investors find psychological comfort in defensive stocks such as tobacco and consumer staples, both globally and onshore.

Examples of this are Tiger Brands, which seems to be hitting new highs every day, as well as Nestle and Heineken, which are both doing very well.

We, on the other hand, believe defensive stocks are expensive at the moment and investors will pay a high price for comfort.

We avoided these shares until recently because they were expensive and very popular, but since 2008, pockets of affordability have started to appear and we are increasing our commitment.

What investors need to understand is that the best way to protect capital is to pay far less for an asset than what it is worth, and to avoid over-priced “popular” assets. All of our bottom-up decisions are based on finding cheap, high-quality securities trading at market prices significantly less than their values.

We are attracted to market dislocations, where bad things are happening and where the headlines are negative.

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