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UK-based fund manager Sean Peche shares his views on two very topical investment themes; the growth to value rotation and China as an investment destination. The growth to value rotation seems to be in full swing, with a 7% differential between the MSCI Value Index compared to the MSCI Growth Index in the first two trading weeks of 2022. Peche puts this down to interest rate hike and inflation concerns, as investors are searching for ways to make a real return (gross return less inflation) on their money. Peche outlines the risks of China as an investment destination, with Tencent’s recent corporate actions dominating the conversation. Tencent’s value should be of concern to many South African savers, with Naspers and Prosus deriving its value from the Chinese tech titan. – Justin Rowe-Roberts
Sean Peche on the growth to value rotation:
It is stark. It’s a significant differential in a short space of time and more importantly, value is up and growth is down. So, this is not a case of you’re getting rich faster if you are in growth. You have actually got poorer this year. That’s not a good place to be. What are the differentials? Well, often in the last few years when I’ve spoken about this value or growth argument and the reasons for being in value, people have pointed out a few things. The first thing is value always does badly in weak markets. This stuff about protecting the downside hasn’t worked because if you look at 2008, value underperformed. If you look at 201, it underperformed. If you looked in the pandemic, value underperformed. They are absolutely right. The reason is value is exposed to economically sensitive sectors such as energy, materials, financials, etc. All those weak markets were caused by economic downturns and concerns over the future. This weak market is not caused by that. The market is on fire. The economy is strong, labour is tight, etc. It is caused by valuations. That is what is happening. Interest rates turning and inflation being higher has meant that [people question]: how am I going to get a real return on my money? That is what investors really want. It’s easy to justify high price earnings ratios when interest rates are low, but when interest rates start moving up, it is harder to justify. That is what’s going on out there right now.
On whether this is just the beginning of the rotation into value:
I think it is the beginning of the rotation, and remember, this move to growth has taken place over the last 10 years. I mean, it’s been one-way traffic since 2007. I was on BlackRock’s conference call the other day; they have got R10trn dollars in assets under management. I think they hauled in $450bn in the last quarter. I’m going to work hard. I haven’t done it yet but I’m going to work out how much money went into value. Unfortunately, what happens is people always look at historic performance and think the future is going to be just the same and they go on with that. So, when people are allocating money, they allocate it to last year’s winners. Interestingly, last year, value beat growth. Just by a little bit, but it just shows you the move was underway.
On Tencent’s unbundling and selling off equity stakes in its investee companies:
I’m not interpreting it well at all. So, two things – if you want to unlock value, there are two ways to do it: you can spin off or you can sell. Of course, the benefit of selling is that you get the cash. If you spin off, you don’t get the cash. The problem is they have had to spin off JD.com. If you got debt at the centre and you spin something off, you lose the asset but are still left with the debt. That is the problem. So, if you’ve got a lot of debt, what you want to do is sell assets and use the cash to pay the debt and then everybody’s happy. But they are certainly not in the driver’s seat right now. And that is the problem.
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