Feature – Undervalued assets
UNDERVALUED ASSETS: TREASURE HUNT
Indications in the markets suggest undervalued assets are prevalent. Andrew Holt set off to see if he could find them.
Given the unpredictable nature of the markets, seeking out undervalued assets is an understandable pursuit. But market volatility and the subsequent falls in some asset prices have changed the game.
The upheaval that rocked the global financial markets last year is the principal catalyst behind some segments of the market being classed as undervalued. But given the vastness of the investment universe, where should long-term, value-hungry investors look? There are, inevitably, different interpretations on which parts of the mar- ket are undervalued.
On a valuation basis, every sector across Morningstar’s cover- age universe trades below its fair value estimate. This presents a wide field. It also gives an insight into the damage done by the market volatility last year. Based on such valuations, the group sees the best positioning for long-term investors in overweight value and growth stocks, which are 15% and 16% undervalued, respectively, and under- weight core stocks, which are trading closer to fair value.
20 | portfolio institutional | July-August 2023 | Issue 125
A closer look at specific sectors, show that small-cap stocks remain the most undervalued on a 25% discount to fair value. And the most undervalued category in the Morningstar Style Box is small-cap value, trading at an almost 40% discount to fair value – in what should amount to a significant attraction to investors. Real estate also features within an undervalued assessment, having become even more undervalued, trading now at a 15% discount to fair value, according to Morningstar. Sectors such as industrials are trading close to their fair value estimates, while consumer cyclicals and communications look particularly attractive.
Health and wealth
US healthcare also offers an opportunity for investors, says Blackrock’s chief investment officer of US fundamental equi- ties, Tony DeSpirito. “He looked at the Russell 1000 for two years following the ‘yield curve inversions’ that appeared in the US market, and saw a “good performance from healthcare,” he
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