Price dislocations pave way for active managers

The current market is ripe for active equity fund management skills to shine given the price dislocations, and most notably in regions outside of the US, according to J.P. Morgan Asset Management.

Every time the spread widens out between the most expensive companies and cheapest companies - which is where the market currently is today - it indicates that there's a lot of price dislocation in the market, Hong King-based J.P. Morgan Asset Management managing director Regina Liu said.

"That is also a time when we advocate for active investment management, because it means that there's a lot of opportunities happening in the market at this particular junction," she told the 2024 Stockbrokers and Investment Advisers Association Conference (SIAA) on day one.

This was not the case around 2016 and through to 2018, an era marked by Brexit, US-China trade war tensions and underscored by sentiments of pessimism.

Liu saw that equity markets at the time comparatively didn't experience as much dislocation but did exhibit crowding of trades, causing the market to be less favourable from an active management standpoint.

"While there a lot of uncertainties, given a lot of some of the risk coming through, we are actually seeing that spread widening out, which means that this is a particular market environment that we think is going to be favourable for being active," she said.

Many investors would argue that equities appear too expensive now, particularly the Magnificent Seven stocks of Tesla, Alphabet, Amazon, Apple, Meta, Nvidia, and Microsoft.

Compared to their 2021 levels, Liu said the Magnificent Seven's valuations are not as stretched.

"If you think of the earnings capability of these companies ever since accelerated computing and disruptive technologies have come through, and you consider the enterprise value of these company and the cash flow generation multiples of these companies, I would still try to argue that the valuation for these tech companies are not that stretched," Liu said.

She also pointed out that investors should consider looking outside of the US for opportunities to truly diversify their portfolios.

It doesn't mean there aren't good opportunities in the US, Liu explained, rather it's more important to be agnostic about where the company is listed.

"We're much more interested in where revenue generation exposure of the company and where the economic growth of the company is really coming from," she said.

One example she used is LVMH, the French luxurious brand company listed in Europe the generates more than 60% of its revenue outside of Europe.

Some investors argued that several risks surround Europe like its sluggish economic growth and the UK-Russia war.

"I would say to that is investing in European companies should be decoupled with investing in Europe as a market, because if you look at MSCI Europe as an index, about 50% of the revenue of the companies are not operating in Europe, they're actually getting a lot of their exposure outside of Europe," she said.

"If you break down the entire global equity market, by regions, I would still argue that apart from the US, none of the regions is trading at much more expensive level than their historical averages."

Financial Standard is the media partner of the 2024 Stockbrokers and Investment Advisers Association Conference.