Though the market appears to have rebounded, visibility remains cloudy in the short term. With many ...
Though the market appears to have rebounded, visibility remains cloudy in the short term. With many expecting a correction, the sell off was short and sharp. It is a stark reminder of the areas that are clearly overvalued as well as the impact of the US on market sentiment.
All eyes have been on the US economy. So much of US household net worth is tied to the stock market, that the market itself is a prime mover in consumer confidence. Our research into national US housing data discovered however that superficial statistics revealed very large regional anomalies. There has been substantial price deflation in new houses in some areas of the country. These falls in prices have been so great that they have depressed the national averages.
But the data also revealed a vibrant south western and south eastern housing market driven by Hispanic immigration and expansion of the middle classes. This is creating a continual growth in construction. Even by taking a worst case scenario, where we estimated 15% of construction workers lost their jobs and home equity withdrawals went to zero, this cut only 0.78% off US GDP. This reduction would not severely impact global growth.
While there has been some profit taking recently, as a fund manager, market uncertainty often offers great buying opportunities. We deemed the sell off in US housing related stocks to have been a significant over reaction to what was essentially a regional cycle. This provided interesting opportunities to invest in some robust businesses at an attractive entry point.
At a sector level, mining and property are obvious areas of market overvaluation. As contrarian investors, consensus makes us nervous.
Applying this stance to the property theme, our UK Equity fund zero weighted the real estate sector at the beginning of the year. As the sector underwent resurgence in February, this move looked a little premature. Pub, hotel and supermarket operators with large property portfolios continued to benefit from speculative property investment.
In-house research shows the real estate sector is near the top of its cycle, with investment momentum-led as private equity firms, and pension and hedge funds look for a home for vast pools of money. Insider selling by directors and property entrepreneurs reinforces our sector view.
So while in recent weeks it has all been about the sectors to avoid, there remain many great opportunities for UK investors, particularly as the mega-caps are trading at a substantial discount to the rest of the market.