Simon Mawhinney highlights historical share price dislocation

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 At its national investment forum webinar, Allan Gray chief investment officer, Simon Mawhinney said there had never been a bigger gap between defensive and secular growth shares and the more traditional cyclical shares. 

“Fundamentals still drive sharemarket valuation. A company’s value always was and always will be the present value of its future cashflows. Market dislocations today now see large sectors of the market trade at significant discounts to these fundamentals. Other parts of the market appear priced for perfection, or completely divorced from likely fundamentals. 

“Current earnings multiples are high, with expectations for a reasonably quick earnings recovery in most sectors. Also, interest rates and discount rates have fallen across all asset classes, resulting in earnings-multiple expansion. Future returns from here are likely to be modest, particularly once adjusted for whatever inflation outcomes the future presents. 

“In 2020, the technology, materials, consumer discretionary, staples and healthcare sectors have been the winners, while the losers have been the energy, financials, industrials and REITS sectors. There are good reasons for short-term weakness in the cyclical losers, but it’s unlikely that perpetual weakness or business failure won’t significantly impact the winners too. The dislocation which plagues markets today is unsustainable. 

“We see significant potential for outsize relative returns in cyclically-depressed shares. It’s where we believe the value lies.” 

But Mr Mawhinney pointed out that benefitting from this value will require a long-term perspective and a contrarian approach, because the market’s future is far less certain than consensus would have one believe. 

“The market currently offers a rare opportunity to buy cyclical shares at exceptionally low prices. Today’s prices offer an earnings stream at a significant discount to the broader sharemarket and even consensus expectations are for these earnings to grow faster than the average sharemarket earnings in the years ahead. 

“Alumina is a great example of a company with depressed earnings that appear to be more cyclical than structural. 

“Given recent price weakness, Alumina appears to offer attractive upside potential. Investors can buy a low-cost, long-life and unlevered production base for a similar amount to a high-cost, non-integrated capacity in China. Even at current depressed commodity prices, it offers a near 5% fully-franked dividend yield. 

Allan Gray hosts two investment forums a year to keep advisers up to date with changes to the portfolio.