THE COVID-19-induced global stock market crash of 2020 has battered investors – and particularly – the fans of value investing.
In Malaysia, the repercussions were exacerbated by political instability and unabating COVID-19 cases. Understandably, this has led to many long-time value investors growing weary with many pundits claiming that value investing is dead.
But let’s backtrack a little to ask the most intrinsic questions here: what is value investing, and why does it matter?
In a nutshell, value investing refers to an attempt to identify good, solid businesses that are trading below their fair value.
“The habits of companies have indeed changed drastically after COVID-19, and this includes everything from borrowing habits to operational processes. Almost all aspects of companies and businesses have experienced a significant change,” UOB Kay Hian Wealth Advisors Sdn Bhd Head of Investment and Financial Planning Mohd Sedek Jantan told FocusM.
“It can be treated as a specific demand-and-supply shock, the source of which is the lockdown of the real economy and the disruptions in service, trade and production activities resulting from sanitary and epidemic reasons.”
Such extreme changes across different facets have the likelihood of changing the intrinsic value of companies, and in this case, most investors will conduct fundamental analyses with the value investing view.
On the other hand, business performance fluctuates between cycles, specifically expansions and contractions which subsequentially influences the application of value investing.
“Ultimately, desired companies with low valuation, high profitability, and fast growth all perform oppositely in different level under the exposure to the pandemic,” added Mohd Sedek.
Triggering a value rebound
According to Mohd Sedek, there are many factors that can and have triggered a rebound in value investing, among them the announcement.
“The announcement of a successful Pfizer-BioNTech COVID-19 vaccine, the candidate results of the 2020 US presidential election, unprecedented fiscal and monetary support to the global economy and hopes for an accelerated macroeconomic recovery have fuelled strong returns from cyclically sensitive sectors such as banks, energy companies and others whose fortunes are closely linked to economic growth.
“Those sectors often fit the description of value investment which trade at low multiples of their book value, or net worth, he added.
“In a post-COVID-19 world, inflation is on the rise, and thus, value stocks are favourable approaches for this situation.
“As long as the inflation figures remain high, value investing will continue to be relevant, and this creates opportunity for investors who are willing to initiate or expand allocations to value investments,” Mohd Sedek opined.
The roller coaster of emotions
During uncertain times such as these, it is very much an uphill – and weary – task for value investors who are keen to achieve sustainable investment success.
“Value investing is inevitably linked to behavioural finance, whereby in the investment process, investors would often experience a ‘roller coaster of emotions’,” Mohd Sedek explained.
“You are not alone. After all, the cyclical investment process which includes information procurement, stock picking, holding and selling investments, followed by making a new selection, is full of psychological pitfalls.”
It is only by becoming aware of and actively avoiding behavioural biases can investors reach impartial decisions, he opined, adding that the emerging field of behavioural finance aims to shed light on true financial behaviour.
“Albert Einstein once famously said that compound interest is the most powerful force in the universe. Through value investing, investors can harness the power of compounding by reinvesting dividends and investment returns.
“By doing that, over time investors will benefit from interest earned on top of interest,” concluded Mohd Sedek. – Aug 9, 2021
