Value investing is making a comeback as momentum strategies fade. Nathan Hughes reviews the latest ASX reporting season.
- Valuation back in vogue
- Sharp market moves
- Find out about Perpetual ESG Australian Share Fund (Managed Fund) (ASX:GIVE)
Market volatility during the ASX reporting season indicates investors are shifting back to fundamentals, reinforcing the enduring principle that a disciplined focus on valuation can provide protection against market uncertainty, says Perpetual’s Nathan Hughes.
Markets savagely marked down companies that missed expectations during the half-yearly reporting season, while many that were undervalued and delivered solid results saw strong positive responses from the market.
The reactions mark a decisive market shift in market sentiment that indicates investors are returning to the kind of valuation-focused approach that has largely been overlooked in recent years.
“February reporting season was a good example that the price you pay matters for your investment,” says Hughes, who manages Perpetual’s ESG Australian Share Fund (Managed Fund) (ASX:GIVE).
“It’s a reminder that valuation matters – obviously that’s at the core of our investment philosophy, but in times of speculation it can often be forgotten.”
Bank stock concern
Hughes says a sharp dip in bank stocks is the clearest indicator of the change. After being among the strongest performers over the past 12 months with valuation multiples expanding beyond historical norms, the bank index dropped following earnings updates.
“A lot of things were priced for perfection, and when a little bit less than perfection was delivered to the market, the response was pretty savage.
“Share price moves are driven by expectations and sometimes the expectations can become a little irrational. Any disappointment can produce bad share price outcomes.”
Benefits of value investing
Hughes says keeping focus on value can help protect investors against market uncertainty.
While there will always be highly-valued, strong performers that surprise to the upside, paying a sensible price for a stock is a far better approach for most investors and will be rewarded over time, he says.
“In short term bull markets, you can get left behind a little bit. But ultimately, fundamentals rule.
“The February reporting was a neat demonstration of that. It was a good month for value and a good month for us as a firm.”
He highlights the jump in the previously out-of-favour A2 Milk Company, which exceeded analysts’ “quite low” expectations with its latest results, and outdoor advertising business oOh!Media, which was swiftly rerated after demonstrating strong cost control and early signs of returning revenue growth.
Macroeconomic volatility ahead
Staying disciplined on value is especially important during times of high geo-political and macro-economic uncertainty.
Rapid policy changes from US President Donald Trump and shifting views on tariffs and trade are creating short-term economic uncertainty.
“That just adds another layer of complexity to markets and potential risk for investors to worry about.
“Investing is always uncertain – better valuations are a way of protecting against that uncertainty.
“Valuation discipline is about trying to protect against downside risk and uncertainty – and the events that you don’t see coming.
“Paying a sensible price is a far better approach and is rewarded in the fullness of time.”
ASX winners and losers
Hughes says keeping a tight focus on valuation means share price falls can present opportunities.
Plumbing supplier and long-time market darling Reece saw its shares plunge after posting a result only slightly below investors’ inflated expectations as conditions in its key US and Australian markets weakened.
“Reece is a business we’d love to own again – it’s a really good business that is just not there yet on price.
“That reaction to things that were overvalued has put a few stocks back on our radar. Fundamentally good businesses that were just the wrong price – and now they are closer to the right price.”
About Nathan Hughes and Perpetual ESG Australian Share Fund (Managed Fund) (ASX:GIVE)
Nathan Hughes is a portfolio manager with Perpetual’s Australian equities team. He joined Perpetual in 2010 and has more than 20 years of investing experience.
Nathan manages the Perpetual ESG Australian Share Fund (Managed Fund) (ASX:GIVE), including its unlisted share class, as well as the Perpetual Income Share Fund.
Find out about Perpetual ESG Australian Share Fund (Managed Fund) (ASX:GIVE)
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