Undervalued assets – Feature
says. “It is lagging so far in this cycle, which only makes for a more attractive entry point into a well-priced and recession-resilient sector.” Peter Abrahams, senior investment consultant at Lane Clark & Peacock, takes a diplomatic approach to the undervalued idea, while indicating there is indeed value in some assets within the market. “While it’s hard to describe anything as looking particularly undervalued at a time of economic uncertainty, where many assets have actually rallied so far in 2023, including a fairly nar- row AI-driven rally in developed market equities, a couple of asset classes that may look attractive at present are short-dated investment grade credit, particularly in the UK, and Chinese equities.” For short-dated UK investment grade credit, given the signifi- cant rises in short-dated UK government bond yields, the total yield now available on “high quality UK names looks pretty attractive over a two or three-year horizon,” he says. However, Abrahams notes that with inflation looking ‘stickier’
in the UK than other major economies, there is the potential for mark-to-market losses if yields continue to push upwards. “For investors holding bonds to maturity, yields upwards of 6% per annum look an attractive return over a two to three-year horizon.” Although an economic downturn more severe than expected could lead to a pickup in defaults.
Risk and reward For Chinese equities, a short-lived ‘post-lockdown’ rally at the start of the year has given way to losses as many investors – particularly in the West – have exited positions, he adds. On the China theme, Abrahams notes the appeal, albeit with qualifications. “While China has looked attractive on traditional valuation metrics for quite some time, clearly there is a high degree of political risk, surprise regulation and geopolitical uncertainty weighing on prices.” Having set out the China proviso, he sets out the China case: “Reasons to be positive in the short term however appear to be low inflation – meaning the Chinese central bank has scope to
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