Global IT and consumer stocks looking overpriced, while developed world financial and energy stocks attractive
16 October 2012 | Investments | General | Old Mutual
A price bubble appears to be developing in the global IT sector, led by Apple Inc, while traditionally defensive sectors like consumer goods and health care are also looking very expensive, according to Craig Chambers, MD of Dibanisa Fund Managers. Meanwh
Speaking at a press conference in Johannesburg today, Chambers said: “Offshore equity has been a particularly popular asset class for South African investors – and indeed the rest of the world - this year, given the attractive valuations in certain regions and growth potential in others, plus the diversification benefits. The record-low global interest rates have also made fixed interest assets less popular. We can see the consequences of these conditions in the high prices prevailing in certain sectors and shares, and investors should be cautious about simply ‘following the herd’ in their investment choices.”Dibanisa’s fund that tracks the FTSE RAFI All World 3000 Index clearly reflects these conditions. To determine company weightings, the index uses a fundamental valuation methodology, closely linked to a “value” investing approach, which relies on five years’ worth of four key company measures - cash flow, book equity value, total sales and gross dividends – instead of market capitalisation. It then underweights and overweights positions in the 3000 stocks across the globe that make up the FTSE All World 3000 Index. This is an enhanced index approach.
Interestingly, Chambers points out, currently (to the end of September 2012) the fund is very underweight in its exposure to the US market, as well as to Switzerland and Hong Kong to a lesser extent. These markets no longer represent good value after having been bid up in the flight to quality and defensive assets, he notes.
At the same time, it is overweight in countries hard-hit by the European financial crisis including the UK, France and Germany. This is because energy companies such as BP, Total and E.ON are exhibiting strong cash flow generation and are consequently paying very decent dividends. Given continued Middle East unrest and rand weakness, these Energy sector overweights offer a good oil and rand hedge. Other large bets include Deutsche Telekom, Vodafone and AT&T. This global telecommunication sector has a dividend yield of over 6%, which is very attractive in a low return world.
“If you look at sector exposure, the fund is telling us that the global IT sector is very overvalued with a price-earnings (P/E) ratio of 20.3 times and a dividend yield of only 2.45%. So it has an exposure to the sector of only 5.59%, nearly half of the 10.66% weighting in the FTSE All World 3000 Index.
“Consumer goods is another sector being overvalued due to investors’ current herd mentality into defensive stocks. The sector is sitting on a P/E ratio of 17.3 times, while the dividend yield is only 3.06%, and our FTSE RAFI All World 3000 Index tracker fund is underweighting the sector with a 10.29% holding versus 12.64% in the index.”
On the other hand, Chambers notes, financial sector shares are looking attractive thanks to a P/E of 13.32 times and a dividend yield of 4.15% among other measures, which are causing the fund to overweight its exposure to the sector at 25.28% versus the index at 20.73%. “The fund’s approach looks strictly at the companies’ fundamental measures and discounts any negative investor sentiment around the risk of banking shares, for example,” he points out.
If you look at the stocks being avoided by the fund, it appears as though another tech bubble similar to that of the late 1990s is developing, with five of the top six underweight stocks all in the IT sector. “The fund has a significant underweight to Apple Inc, with only a 0.27% holding compared to 2.06% in the Index, and it is also underweight Amazon.com, Google, IBM and Microsoft,” says Chambers. “Apple’s market capitalisation has skyrocketed far beyond the company’s actual economic impact – at R5.2 trillion, its market cap is larger than the GDP of Switzerland and it is overly influencing traditional market-cap indices.”
The fund’s top 10 overweight shares include Bank of America, BP, Citigroup, Deutsche Telekom, E.ON, Total, Banco Santander, AT&T, Vodafone and Verizon. “It’s not surprising, given the sector valuations already mentioned, that the fund is taking large overweight positions on big financial stocks from stressed economies like Bank of America, Citigroup and Banco Santander of Spain,” Chambers observes. “These are highly regarded companies with sound fundamental measures whose stock prices have been hit hard by the global financial crisis. They represent good long-term value for investors according to the fund’s fundamental methodology.
“In times of poor investor sentiment like these, the fund can underperform the index over shorter periods,” he adds. “However, for the 10 years to 30 September 2012, the FTSE RAFI All World 3000 Index consistently outperformed the MSCI All Country World Index by 2.6% per year, with an annualised return of 11.7% versus 9.7%.
“So South African investors still considering investing offshore should be wary of the current market conditions and avoid the herd, with trendy shares like Apple looking overpriced,” cautions Chambers. “Offshore diversification is important, but not at any price. Our recently launched Old Mutual Global FTSE RAFI All World Index Feeder Fund is an excellent way for SA unit trust investors to gain offshore diversification at a fee which is at least 50% lower than average global equity competitor unit trusts.”
