财经观察 1788 --- Aberdeen remains wary of value traps

Aberdeen remains wary of value traps in global equities By Rita Raagas De Ramos  |  23 February 2009   A lot of companies look attractive at face value, but remain fundamentally risky, notably US and UK banks, says Aberdeen's Andrew McMenigall.

Andrew McMenigall is an Edinburgh-based senior investment manager on the global equity team at Aberdeen Asset Management. He is among the managers of the $700 million Aberdeen Global - World Equity Fund. He speaks with AsianInvestor about his views on global equities, and about how investors can find value in the current uncertain environment. What will it take for confidence in equities to return? McMenigall: Consensus is always wrong or lagging. It's never ahead of the curve. In terms of people's view that equities are the place to put their money, I have no idea if that is a consensus or not. From our perspective, if you think about it, the MSCI World Index was down 42% last year -- one of the worst performances ever in history. There's obviously a lot of bad news that has already been reflected. Equities generally tend to be a discounting mechanism. I would certainly think that equities have already discounted a lot of the bad news. The problem is everybody is guessing because we really are in unchartered territory. The global crisis that we are now all suffering from is perceived to have started from the United States. That is a gross over-simplification of what's actually happened. But even given that, if you were to believe that's the case, the US from an economic perspective has not stabilised yet so you are seeing where people are most concerned -- the US housing market has not stabilised and the global credit market has not stabilised. What do you believe is a gross simplification? A lot of people looking from outside the US find it easy to blame the US for what's happening. The US is certainly not blameless, but it shouldn't take all the blame. One school of thought is that deficit is a bad word -- and obviously the US had a budget deficit, trade deficit, current account deficit -- and surplus is a positive word. But what I would suggest is people should consider that they are two sides of the same issue. If you think of China, which has a huge current account surplus, it has therefore so much excess capacity relative to its own underlying demand. One could make the case that China was complicit in terms of the bubble being built up. It's not just the United States. If you look at the United Kingdom, it's a much more perilous situation in terms of what this bubble that appears to have burst. We don't know to what extent a lot of the emerging markets have benefited and improved to the extent of enjoying the trade rise as it were. How bad is it that credit markets have not yet stabilised? The fact that credit markets have not stabilised, from a global perspective, is problematic. A lot of people think that corporate bonds appear to be very attractive. The only issue is that there's just no liquidity. There's just no volume out there. What is your view of current valuations in equity markets worldwide? For us, 18 months ago was really quite a depressing time. Global markets were quite correlated. The cost of money was effectively nothing. Equity markets were going up and everybody seemed happy. For us to try to find opportunities from a value perspective then was really very difficult. Roll on to where we are now and we believe that we are starting to see some pretty good value starting to appear. In the back-end of last year there were a lot of forced sellers in the market. What could they sell then? Not corporate bonds because there was not a lot of liquidity, not fixed income because there was similarly no liquidity, so they were selling equities. The more liquidity, the more scope there was to be divested. With that move, we believe that we started to see some better values starting to appear. I am not for one minute going to sit here and say that equities are not going to go down further from where they are now. But the way we look at things, we don't look at things from the aggregate but we look at things on a company basis. What do you evaluate when you look at each company? We look at whether a company is going to be a bigger company than it is in five years' time. We are starting to see more opportunities popping up on our radar screen of individual companies that look attractive. The thing is, that comes with a real health warning. One of the reasons we feel that we can be more comfortable is we really do have quite a religious focus in terms of the quality of the company, particularly in terms of balance sheets. There are a lot of companies which on the face of it look attractive, but we would argue that they are still very risky and we would still be very cautious. Classically within that, we would group banks particularly in the United Kingdom and in the United States. We have had no exposure to banks in the UK and the US for five or six years now. The risk is what on the face of it might appear to be attractive on a value point of view, we believe that we will see value traps continually and the big part of that is the ongoing credit crisis that has not been resolved yet. What made you avoid US and UK banks earlier? We believed that they were at the wrong stage in the interest rate and credit cycle. The analogy I would use is the banking sectors in the US and in the UK are like elastic bands. The more the elastic band gets stretched, and in 2008 they actually stretched, the more they could snap and they did snap. It doesn't mean that we are on the way to the system being repaired. It's difficult to believe that the various central banks are already on top of that. You are not convinced that current stimulus packages will work? It's probable that they will work. But it's a guessing game. It depends on how aggressive these authorities are. The sheer scale and magnitude of the problem they are trying to address is huge. The risk for us is there are some companies that will emerge in different shapes. Banks, for example, may have to do a national service and be nationalised. That may not protect the equity shareholders. That's a risk profile that doesn't look attractive. Also there's going to be pressure to increase the level of lending. To what extent that's going to be beneficial to shareholders is difficult to get a sense of. It's appropriate and prudent to sit in the sidelines. I think we will have plenty of time to watch this play out. What are your investment criteria? For the past two years, earnings have been irrelevant. It's such a moving target. What are appropriate are the level of debt relative to cash flow and the sustainability of that cash flow. Book value is also one. But even with book value, one has to be prudent and sceptical. Generally if a company is trading below book and you believe the company has a sustainable franchise, then that's a pretty good starting point. We would shy away from companies whose book value is difficult to determine and a classic example of that are banks. When markets are in a growth mode, everyone wants to know how much markets can grow by. When they are in a value mode, which we are in now, what is appropriate as a measure is the underlying value of the assets. In good or bad times, the focus for Aberdeen is to invest in companies that have physical assets or strong cash flow. How should investors handle their global equities allocations? It really depends on the individual's risk profile and when they need the cash. The more long-term the time horizon, the more appropriate it is to skew towards equities. You're not going to get much return in US Treasuries and cash and you can actually make the case that if authorities are successful at reflating the economy, then one or two years down the line there's the risk of high levels of inflation. Those people holding government bonds from a safety point of view might see a lot of capital erosion. Corporate bonds would be attractive but there's a liquidity issue. As we go through this year and next year, we are going to continue to see levels of volatility that could be driven by a macro perspective. Equities may be perceived to be more expensive relative to earnings. But relative to other asset classes, it is starting to look more and more attractive in aggregate and specifically in some areas. What are the key macro issues that have an impact on your portfolio allocation? We are driven from the bottom-up. You cannot be exclusively bottom-up or top down. What we are doing at the global level is taking a view that we may have from a macro perspective and then feeding that into our fundamental analysis that we do from the bottom-up. A classic example would be banks in the UK and in the US. It is impossible to invest in these companies without a view with regards to what extent they are going to be influenced by the policies of the governments in the US and the UK. According to your Aberdeen Global - World Equity Fund, you had a 22% exposure in financials as of end-December. We have no exposure in UK and US banks. That doesn't give a sense of the level of diversification of our portfolio either by country or by sector. That catch-all category of financials includes banks, insurance, property, investment funds, a lot of which are not correlated with what one would normally assume your financials to be i.e., with the credit cycle and interest rate cycle. It's made up of a much broader range of assets. What will it take for you to go back to investing in UK and US banks? Many people ask us when we think banks will be cheap enough. That's really not the right question to ask. The question to ask is 'what are these banks going to look like when they come out of the crisis?' The March issue of AsianInvestor will contain a feature on global equities.