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Shamik Dhar (SD): What’s your take on how stock markets have responded in recent months? Are there specific sectors or geographies that weathered the storm better than others?
Roy Leckie (RL): In many ways, the volatility we experienced through March and April was typical of a sharp sell-off in that the first phase was indiscriminate. Pretty much every stock, every sector, every geography, every factor fell at the same pace. Correlations were high, which presented a challenge for investors. It took a few weeks for markets to become more discerning, at which point companies with certain characteristics began to do better than the average. The markets did a reasonable job of identifying those companies with better fundamentals. At the sector level, companies exposed to discretionary spending or the oil price were obvious casualties, as well as banks. What’s your view, Shamik?
SD: The big turning point from my macro top-down viewpoint was when the central banks stepped in to provide liquidity. They could see that panic developing as investors made a dash for cash. My sense is that the speed and scale of their intervention really helped to calm things down. That’s the point at which discerning investors might have been able to pick up bargain-basement opportunities.
RL: It’s actually created an interesting dynamic. Ultra free-marketeers might say it’s outrageous that there’s been so much intervention, but I actually think it was the right thing to do. We’ve already got a health crisis. We’ve now got an economic crisis to boot. Absolutely the last thing we need is a financial crisis on top of all that.
It was essential that capital markets remained liquid and continued to function. The amount of money raised in equity and bond markets over the past four or five weeks has been massive. If markets had been clogged up, these companies wouldn’t have been able to access that investor capital – and, ultimately, that would have just added to the public-sector bill for all of this. So I’m very much of the view that authorities have done the right thing, at least so far.
SD: Equities now are about 10% off their pre-crisis peak so we’ve seen quite a significant rally. Do you think those opportunities are still there – or has that window closed already?
RL: The market’s rebound has been amazingly robust. We took advantage of lower prices to a limited extent, and we’re continuing to look for opportunities. Is there any value left? I think it’s subjective. Ultimately, you could say value is always there to be found, regardless of the wider market backdrop and even if it’s not obvious. Among the tens of thousands of listed companies, you can always find those whose long-term prospects are misunderstood or undervalued.
A lot of investors use metrics like historic price/earnings (P/E) ratios. I would argue that they’ve only ever been useful to a limited extent. And right now, with so much murkiness on the outlook for corporate earnings, they really are of little use. That’s why you need to think about value in different ways. Being aligned to strong fundamentals should be the starting point, then working out how much to pay.
SD: Your point on P/E ratios is an interesting one. What do you think about the whole growth versus value debate? Do you think there’s anything left in that, or do you think those style factors are too broad brush?
RL: I put very little store in factor investing, to be honest. There are legions of index providers out there who make all sorts of money from designing factors. I’ve never considered growth and value to be independent investment concepts. They’re two sides of the same coin. In my view, there are other, genuine factors that should take precedent, particularly at the moment. Things like balance-sheet strength and liquidity. They’re both hugely important right now. Then there are environmental, social and governance (ESG) considerations, which have to be front and center of any investment process. When set against these genuine factors, the whole growth/value debate feels like a bit of a sideshow for me.
SD: There’s a lot of talk about shrinking and diversifying supply chains in response to Covid-19. Is that the kind of thing that’s on your radar when you look at companies on your watch-list or in the portfolio?
RL: We’ve always had good engagement with our companies. In recent weeks, we’ve been doing a lot of calls. There’s no doubt the management mindset is changing. It used to be about efficiency – now it’s much more about resilience. Geopolitics and Covid-19 are driving that. Our take is that there will be a fair amount of reshoring as part of a wider effort to increase the breadth and depth of the supply chain. This might cost a few points on return on equity in the short term, but it’ll probably be worth it over the long run. One thing that has been completely debunked since the start of the year is the concept of efficient balance sheets. Borrowing a ton of money to buy back expensive stock is a thing of the past – and I think that’s a good thing.
SD: I agree. That trade-off between resilience and efficiency – that’s something we’re very much interested in. The shift towards resilience forms a decent crossover into the whole ESG question too. We need to worry about all sorts of potential issues – climate change, fairness, inequality – which to some degree we’ve probably underestimated. Do you think this is the tipping point where not just some but all investors will need to sit up and take notice?
RL: I’d say so. History shows that the companies that make the best investments over the long term are those companies that are cognizant of the need to retain and continuously justify their social license to operate. They’ve got good governance. They’ve got the right managers with the right incentives. They pay their suppliers on time. They understand the concept of stewardship. So ESG is just a very obvious bunch of considerations to look at when determining which companies you’d want to own over the long term. We have some huge challenges ahead of us – climate change being one, inequality being another. A global corporate sector that’s efficient, resilient and considerate of the ESG dynamic will be better equipped to deal with those challenges.
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