Opportunities in a Bifurcated Market
Watch George Maris, Co-Head of Equities – Americas, as he talks to Bloomberg TV about recent volatility and where his team continues to see opportunities in global markets.
Guy Johnson: The U.S.-Saudi Arabia rift adds to a growing list of investor concerns that are out there. You’ve only got to think about Brexit, Italy, you saw the German elections over the weekend, the equity markets are certainly feeling the pressure right now – we’ve got more evidence of that today. George Maris, Janus Henderson Co-Head of Equities of the Americas joins us now on set here in London. It’s a very long list of concerns that are out there right now. Equities have sold off over the last few sessions. Given that list, why would I want to step back in and buy the dip right now?
George Maris: Well, I think we’ve got to bifurcate markets, right. You’ve seen, clearly, the U.S. has rolled over recently. But if you look around the world, you’ve got major bourses down double digits, in many cases. I think what we’ve got are tremendous opportunities in really good companies, if you are looking over a cycle. We’ve got a 24-hour, 24/7 newsfeed cycle. We’ve got bad news happening all over the world and it’s reported immediately; it creates tremendous angst. I think the notion of rates rising, potential deceleration in the economy, you’ve got trade wars, et cetera – it’s got everyone on the edge of their seat. That’s been a phenomenon, in my view, that’s occurred since 2008. We’ve been worried about the next financial crisis ever since then, and the world is a lot more resilient. I think that’s the case now.
Johnson: Yeah, but we’ve climbed the wall of worry. My question is: Are we going to fall over that wall and land with a big bump on the other side? You take the earnings season; the earnings season is here at the moment. I’ve already heard on air this morning, on Bloomberg, people talking about this being a make-or-break earnings season. You talked about yields going higher in the govy market; equities need to compensate for that. Are the earnings going to be there to deliver upon that?
Maris: So I would actually take issue with the make-or-break earnings season. I can’t tell you how many times I’ve heard “make-or- break” earnings seasons throughout my career. It’s always the case, right? There’s always drama at that instant. I think what you’ve got now is an issue where we’ve got a bifurcated market. I think there’s parts of the market that are clearly overextended from a valuation perspective. There are other elements of the market, whether geographically or stylistically, that look extremely attractive, and you can buy at tremendous valuations. And so I think any investor has to be looking at the price paid for entry, and you can find yourself tremendous opportunities right now, because some of these systematic dislocations are creating “baby out with the bathwater” type of scenarios.
Vonnie Quinn: Barclays today has gone long 10-year Treasuries in a recommendation saying that it’s target is now 2.95 percent on the 10-year yield, that things have overshot massively, George. What do you make of that at Janus Henderson?
Maris: Vonnie, that’s a really hard one to predict. I would actually probably take the over, not the under; I do think they go higher than this. I think one of the issues we have is, you know, putting greater trade barriers up is stagflationary. That creates higher rates longer term, higher prices across the board as supply channels are changed, as prices paid change. And then if you look at growth around the world, growth is accelerating – not decelerating – in many parts. Certainly in the U.S., growth is strong, unemployment is very low. Cost-push inflation is coming in. I think that creates pressure to long rates, not the other way around. And I think the worry here is – and what the market’s telling you is – we’re a little worried that inflation may get out of control; we’ve been too benign for too long. I don’t think that’s going to be the case, but I would be more worried about rates going up than declining right here.
Quinn: So you mentioned emerging markets there. Do they look attractive to you now? If so, which ones?
Maris: I think some look very attractive right here; I think China looks particularly attractive if you’re looking at a long cycle. I think some of the leading companies out of China are extraordinarily mispriced. If you look at Alibaba right now, Alibaba, just on stated earnings, is trading at 19 times forward earnings. That’s the same multiple as Procter & Gamble in the U.S. now. P&G is a fantastic company, but it is not going to be growing at anywhere near the rate or pace that Alibaba is. And then Alibaba’s stated multiple of 19 times doesn’t account for all of its investments in other businesses, including AD Financial, its cloud business, et cetera. If you “X” those out, Alibaba is trading at a single-digit multiple. That’s the wrong multiple for a company that’s got tremendous secular tailwinds behind it. So I think as you have those kind of companies in your opportunity set that you’re very unlikely to have, be present for a long time.
Johnson: Do I pivot out of the U.S. FANG stocks into the likes of BABA, a Tencent? The U.S. tech sector has had an incredible run; you look at the momentum trade, which has started to come back. You look at the look of the factors – you talked a moment ago about the styles that are trading right now well and those that aren’t. Growth/momentum is definitely feels like it’s coming off the ball at the moment; value is coming back in. Do I pivot out of U.S. tech into some of those Chinese names, maybe?
Maris: There’s a couple of trends that would support that. So, first off, if you look at U.S., if you look at the spread between value and growth in the U.S. alone, you are back at the spread level of where you were in October of 1999. That’s clearly an uncomfortable place to be if you’re really into those heavy-growth stocks. Moreover, those heavy-growth stocks are buffeted by tremendous momentum orientation; you haven’t seen that in a long period of time. Typically, momentum, of all things, tends to be more of a value, not a growth, factor; i.e., companies that are recovering tend to recover for awhile, whereas growth companies tend to stabilize, potentially plateau and decline. That hasn’t been the case over the last two years; that feels very extended. So it’s not as if the FANG stocks and their ilk are not great companies – they are. But the multiples paid now are substantially greater than what you would have paid previously, and the valuations are tougher and tougher to justify. Meanwhile, there is a part of the market given that spread that is extraordinarily attractively valued.
Quinn: So is the committee at Janus Henderson sort of on the move right now, George, or are you waiting through this earnings season before making some more moves?
Maris: You know, Vonnie, we don’t really wait for earnings, or we don’t really wait to react unless they become thesis-disconfirming. We try to anticipate what’s going to happen and invest over a cycle. We’ve certainly been taking advantage over the last several months of some of the disequilibrium in the markets to take advantage of positions that we think will generate tremendous value over the long term. We try to think of ourselves as being private holders, and how would we look at these equities over three- and five-year period.
Quinn: All right. George Maris, Janus Henderson’s Co-Head of Equities for the Americas. Thank you.
Foreign securities are subject to additional risks including currency fluctuations, political and economic uncertainty, increased volatility, lower liquidity and differing financial and information reporting standards, all of which are magnified in emerging markets.