Chris Hiorns, lead fund manager on the ABN AMRO EdenTree Sustainable European Equities Fund, discusses the fund’s high value bias and examines sector positioning for 2023.
During 2022 growth stocks significantly under-performed, as they could no longer maintain their excessive valuation multiples amid higher inflation, rising interest rates and bond yields.
We believe the collapse in ‘growth’ valuations (symbolised by the -32.5% return by the Nasdaq compared to the Dow fall of just 6.9%) represents a decisive break in trend where growth stocks had tended to perform value for most of the last decade driven by little more than momentum.
In 2023, we intend to maintain a high value bias, as ‘value’ stocks and sectors of the market continue to trade at a historically high discount to the market and correspondingly ‘growth’ trades at a historically high premium to the market.
‘Value’ stocks should also tend to perform better than growth in the more inflationary environment whilst growth stocks can be expected to continue to suffer from the shift away from virtual solutions as the economy normalises post Covid, which is not yet fully reflected in company results.
In terms of sectors, we remain overweight to both the banking and insurance sectors which should benefit from higher interest rates and bond yields, with the banking sector in particular benefitting from a strong capital position built up over the last decade – which will now enable accelerating returns to shareholders in the form of dividends.
We have increased holdings in Healthcare which has derated compared to the rest of the market and presents good value at present valuation levels given its structural growth story combined with defensive income streams.
We also believe telecoms is one of the cheapest sectors in the market and offers high and sustainable cashflows and dividend yields, supported in many cases by the passing of the peak in capital expenditure relating to the 5G rollout and opportunities in ‘edge’ applications such as metering and the growth in autonomous applications.
We have good exposure to the energy transition within its industrial and utility holdings as it seeks to benefit from increased expenditure in this area. We expect this to continue as countries seek to reduce carbon emissions beyond any change in geopolitical events in Ukraine.
We continue to follow a value-orientated contrarian investment philosophy aligned with our responsible & sustainable process. The sector and style biases of the strategy are very much driven from our bottom-up stock picking based on fundamental analysis.
We remain underweight towards consumer staples which still trade at unhealthily high valuations given their limited growth opportunities and the increasing lack of support from low bond yields.
We are also underweight towards technology stocks which still trade at excessive multiples despite the sell-off in the last year with analysts continuing to price in hugely ambitious forward earnings and growth expectations.
