Investors need to focus on valuation

Investors need to focus on getting their company valuation correct instead of pricing in earnings growth expectations at normal levels, Lazard Asset Management said.

According to the firm’s portfolio manager on global equity franchise team, Warryn Robertson, investors were often thinking that low interest rates would always benefit them.

“At this point, we believe it is worth remembering that interest rates are low for a reason,” he said.

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“Many equity market investors seem to be falling into the trap of thinking that interest rates are low purely for their benefit.

 “Investors are pricing in earnings growth expectations at normal levels, such that low interest rates are seemingly the rationale for paying higher multiples for many stocks.” 

Robertson said he believed that if investors lowered the discount rate because bond yields were so low, but maintained trend earnings, it was still mathematically possible to justify some of the multiples that were seen in global equities, especially in the technology and consumer staples sectors.

“However, in the long run, a business cannot grow faster than the economy or economies in which it operates,” he added.

As far as opportunities in 2020 were concerned, the company noted that the biggest concern was that the economic picture would not match with equity market valuations.

“We do believe that we are in the latter stages of a tech boom. Software stock valuations stand near to the highest levels seen since 2000,” Lazard’s Australian equity team’s portfolio manager, Aaron Binsted, said.

“Even the valuations of more mundane sectors look challenged. The ASX Industrials Index is trading at a 30% premium to pre-GFC boom levels at a time when earnings estimates have been falling.”

However, on the positive note, there would be pockets of reasonable value in the market, in particular across the resources sector as well as some domestic infrastructure.

“We are confident that valuation focused investors will be rewarded for their discipline as we enter a late cycle period. History shows that when these cycles reverse, they do so aggressively,” Robertson concluded.

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