Where to find value in markets today?

Value depends first and foremost on your time horizon - how long are you prepared to wait to get your returns?  Having said that there are pockets of value even in today’s extended stockmarkets.  You can choose to pay 30x for a ‘safe’ dividend earner or a high-flying tech giant, or you can look at some of the following.  None of them are risk free and most are unpopular, but that’s what value is all about – looking where the herd isn’t.  I hasten to add that I do put my money where my mouth is and may well have positions in stocks in these areas.  

 

Quoted infrastructure – under threat from McDonnell’s pronouncements and dented by the Carillion collapse, but trading at discounts to NAV of up to 10% and offering inflation-correlated yields of 5% or more.  That’s a real yield of 7% more than index-linked gilts.  What’s not to like?

 

Quoted private equity - trading at discounts to NAV of up to 15% and in a good position to pick up smaller and mid-size quoted companies where MIFID2 will have the unintended consequence of reducing, even eliminating, research on them resulting in their becoming extremely cheap.  Of course, you could simply buy the companies but that requires significant analysis and I expect them to become a lot cheaper first.

 

Woodford Patient Capital Trust - Neil Woodford is under the cosh at the moment but if you read the commentary on his exemplary website you will see that a lot is going right as well as a few high-profile things going wrong.  His portfolio is heavy on bio-tech, where most trusts trade at a premium rather than a 10% discount to NAV.  But the clue is in the name – you do need to be patient.

 

Japan - I am not a huge bull of the Japanese equity market but to my mind it is exposed to a lot of the right dynamics at the moment: the domestic economy recovering after 25 years, China’s economy reaccelerating, higher military spending in the region etc.  It’s also still a highly inefficient market and in this respect may foreshadow European markets now that MIFID2 is  eviscerating research.  See my comment about private equity above, which equally applies in Japan.

 

If current market trends continue, the first three could all get cheaper in the short term as the lemmings gallop over the cliff.  But at Linchpin we think that they offer a lower risk way of generating returns when the next bear market, as it undoubtedly will, descends on us. Feel free to email or pick up the phone to discuss any of them in more detail.