Close to 8% of the M&G Dynamic Allocation Fund is allocated mainly to US banks. Moran is the deputy manager of the fund.
“US banks have had stock price underperformance despite the fact that they are considerably cheaper than other sectors of the market,” said Moran, speaking on the sidelines of the FSA Growth Forum in Hong Kong.
“We take encouragement from the fact that people are so negative and bearish about that sector because it shows the skepticism is not about fundamentals, but is from an emotional and behavioural bias.
“This shows investors are ignoring the fundamentals and valuing those assets based on past experience and that’s very much reflected in the price. Sentiment will fade over time and when fundamentals continue to deliver strong results, people will change their view about those assets and we could see a good re-rating from here,” he said.
He said that valuation is always the starting point when considering investment. “Secondly, the fundamentals of some of these markets are quite attractive.”
North Asia upside
The fund also has big positions in North Asian equities, such as South Korea (4.5%), Taiwan (3%) and Japan (8%).
Moran said Taiwan and South Korea equities are attractive from a valuation perspective and some have a double-digit yield.
Japan is one of the cheaper markets globally, he said. “We like it for that reason. At the same time, there’s still [some] level of pessimism because Japan has been in a 30-year growth slowdown, despite the fact that they have improved their corporate governance. The market is still ignoring that, so we think there is upside opportunity.”
Emerging markets are a different story. Moran sees some inconsistency between valuations and fundamentals in the EM countries and he does not view those assets positively.
“In the emerging markets, we have seen falling prices, but we have also seen deterioration in fundamentals. So company profitability has been falling as well.”
His view is in contrast to others such as GAM, which believes that emerging market equities are likely to outperform those of the developed markets. Falcon Private Bank also believes that sentiment has turned in favour of emerging market equities.
Moran said at the Forum that he likes volatility as “peaks in volatility have tended to be good entry points for equity markets, coinciding with cheap valuations”.
In his view, investors will need to tolerate and exploit volatility given a change in risk preference.
He said investing in bonds has been a profitable strategy, as strong returns have been evident in the asset class with limited volatility over the past 15 years.
For example, total return of global government bonds was at 5.4% per annum, while that of global corporate bonds was at 5.9%, but total return of global equity was at 5.2%, he said.
However, the trend has changed. Expected returns on low volatility assets have collapsed, which means “the past journey is unlikely to repeat”.
Regarding the change in risk preferences for US government bonds, he said people previously very much liked the bonds because yields had gone up steadily and interest rates had stayed low for an extended period of time.
But concerns over further US interest rate hikes have made people rethink their investment strategies and they have started selling assets with lower volatility, such as US government bonds.
