According to Nygren, several names in the banking sector remain undervalued relative to their potential long-term profitability. While a decrease in short-term interest rates would affect the current income of deposit franchises, he doesn’t see the sector as threatened by serious interest-rate risk over the long run. “I don’t see any reason to think that – over the long term – short-term interest rates will stay below the inflation rate.”
Cooking with oil and gas
Nygren also sees opportunities in exploration and production (E&P) companies – a subset of the oil and gas industry. “It’s a space we like a lot – some of the US E&P companies look cheap.” He suggests that many of these companies are showing earnings and cash flow levels that bode well for future value in proportion to their current market price. What’s more, Nygren believes “long-term oil prices need to move higher in order to support global growth.”
Trade war or trade feud?
News of the ongoing trade dispute between the US and China is likely to continue through the summer months, but David Herro, Partner, Portfolio Manager, and CIO of International Equities for Harris, believes investors should be mindful of getting carried away by headline hysteria. “This trade war really hasn’t had a major market impact,” said Herro. However, he cautions that a long-running, increasingly contentious trade dispute between China and the US could have negative consequences for businesses and the broader global economy.
The key to understanding the clash, according to Herro, may be in deriving the motives of US trade policy. “Are US tariffs on China a mercantilist move? Is the US trying to build barriers to subsidize homegrown companies? Or are tariffs a bargaining ploy?” “I still believe that all this rhetoric is about trying to get a level playing field and bringing China more in line with the rest of the world,” said Herro.
In terms of sector opportunity, Herro maintains a positive take on the mining sector. He believes several companies in the mining space have gotten rid of excess debt and are growing their cash flow streams. “They have excess capital and they’re starting to reinvest and increase capital expenditures,” he said. “To me, it’s a very good opportunity. Valuations are too low today for select cash-flow generative companies.”
Focused on long-term value
A frenzied news cycle and the potential for attendant market turbulence may continue to put a chill in investors throughout the summer season. However, rather than running for cover or giving over to emotional decision making, they may be better served by an active, risk-managed approach that unites experienced analysis of business fundamentals with an enduring long-term perspective.
All investing involves risk, including the risk of loss. Investment risk exists with equity, fixed income, and alternative investments. There is no assurance that any investment will meet its performance objectives or that losses will be avoided.
Stocks are volatile and can decline significantly in response to broad market and economic conditions. Value investing carries the risk that a security can continue to be undervalued by the market for long periods of time.
Unlike passive investments, there are no indexes that an active investment attempts to track or replicate. Thus, the ability of an active investment to achieve its objectives will depend on the effectiveness of the investment manager.