Strong underlying forces pushing the US economy forward, continued investment in real assets and growth in Japan look set to spur value stocks between now and the end of 2023.
These three themes will emerge despite the likelihood that geopolitical events and central bank decisions will continue to drive market volatility over the next few months.
“We will continue to look for these dislocations to provide chances to purchase quality companies below what we believe to be their fundamental value,” said Christian Correa, chief investment officer of Franklin Mutual Series.
Regardless of the market environment, the three themes of the US macroeconomy, real assets and Japan stand out against the backdrop, he added.
US macro opportunities
The first of the firm’s picks is based on the US economy withstanding inflationary pressures. While the combination of the tight labour market, high levels of consumer spending and strong economy across several industries has fuelled inflation, these dynamics have also generally been positive for economic activity.
At the same time, the prospect of higher-for-longer interest rates triggering a recession has made investors nervous. If job losses materialise and confidence falters, in turn impacting consumer spending, it might dampen pricing pressures.
Yet, as US inflation continues to subside and labour markets remain strong, Correa believes there are opportunities at reasonable prices.
“Moreover, long-term interest rates have a greater bearing on economic strength than short-term rates, in our view,” he added. “And through the rate hiking cycle, long rates have responded more slowly and have remained near historic lows.”
A promising Japanese story
Beyond the US, notable opportunities to invest in undervalued companies are emerging in Japan, where the economy is poised for growth and modest inflation.
This aligns with efforts by the government, stock exchange and shareholders to push companies to become more dynamic – based on the overarching catalyst for reform of shifting demographics that require social insurance payments and healthcare to be funded.
“Unlike in the past, management teams are now younger and more willing to change,” said Correa. “As a result, we see a focus on corporate reform and returns on equity, producing new investment opportunities.”
The firm’s approach to investing in Japan mirrors what it does in other markets: seeking inexpensive, undervalued companies that can find new growth opportunities globally and where management is willing to engage.
Allocating to real assets
Another positive development for value investors globally is the expectation of increased spending on infrastructure.
According to Correa, recent US legislation incentivises US infrastructure building and reshoring initiatives, while Europe and Japan have their own initiatives.
“Spending on projects has only just started and we expect increased construction and manufacturing activity to bolster the economy and revenues for companies that produce physical items, like mining and aluminum companies, or those which could benefit from the knock-on effects of increased demand for these things,” he explained.
In particular, value-oriented companies that deal in building materials, construction equipment, manufacturing and other related industries should see increased demand as this trend continues over the next several years.