Tilting towards Value by Steve Brice; Standard Chartered Bank’s Chief Investment Officer for Wealth Management

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We maintain a bullish outlook for global equities in general for 2021. However, we are switching our bias from a preference for the so-called Quality and Growth stocks to an increasingly optimistic outlook for Value equities. 

At a high level, Growth stocks are companies with a high expected earnings growth rate. Value stocks are companies that are cheap relative to the rest of the market. While valuations for all areas of the market look expensive relative to their own history, Growth equities appear to have discounted a lot more good news and, therefore, there is scope for their Value counterparts to play catch up.

Tilting towards Value by Steve Brice; Standard Chartered Bank’s Chief Investment Officer for Wealth Management Brandspurng
Steve Brice; Standard Chartered Bank’s Chief Investment Officer for Wealth Management | www.brandspurng.com

It might sound strange, but Growth stocks did extraordinarily well in 2020, despite the unprecedented recession. There are two main reasons for this. First, the sector composition of the Growth universe of equities could hardly have been better suited for the pandemic year, with almost three-quarters of the index coming from 4 sectors – Technology, Consumer Discretionary, Healthcare and Communication Services – which were the main beneficiaries of the COVID-19 outbreak.

Second, the collapse in interest rates and bond yields reduced the discount rate feeding into equity valuation models. This had a much larger impact when it came to valuing Growth companies where the future earnings are expected to rise sharply and sustainably. Therefore, much lower yields meant sharply higher valuations could be justified.

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On the other side of the equation, the Value style was hurt by its sector composition – with the two largest sectors being Financials and Industrials, while the weight of the Energy sector is 16 times that of its weight in the rival Growth index.

These sectors were amongst the worst hit by the sharpest recession on record (remember there was a bizarre day in 2020 when owners of crude oil were paying people to take it off their hands).

So why do we think that Value may outperform in 2021? We believe there are three key factors to watch when it comes to a potential pivot towards Value – economic growth, inflation expectations and bond yields.

Stronger economic growth (above 3% in the US and globally) and rising inflation expectations and bond yields would be seen as supportive to Value equities and detrimental to the Growth style. This may sound counter-intuitive, but in an environment of stronger global economic activity, the so-called Growth equities lose their “growth” advantage.

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We believe economic growth will rebound strongly in 2021 as coronavirus cases peak and vaccine distribution allow for significant economic reopening. The exact timeline for this is clearly uncertain, as shown by early disappointment in vaccination deployment and further spikes in COVID cases in Europe and the US, and to some extent in Asia.

However, we believe a tipping point will be reached over the coming months, resulting in much stronger growth. Potential further upside surprises on the economic growth front could come from fiscal policy in Europe and the US.

We are a bit more sceptical about sharp rises in either inflation expectations (given large excess capacity in the global economy) and bond yields (as central banks appear keen to intervene in bond markets to cap any increase in funding costs).

Subdued inflation and bond yields should not preclude the potential outperformance of Value stocks in 2021 for three main reasons. First, the sharp underperformance of Value equities in 2020 means that even if they were just to return to the trend seen since the Global Financial Crisis of 2007/8, this would lead to a sharp outperformance in the coming months.

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Second, while Value stocks look expensive on traditional metrics relative to their  own history, this could easily change if the fortunes of companies were to improve from the depressed earnings outlook that most analysts and investors hold. Meanwhile, relative to their Growth counterparts, they are extremely cheap.

Finally, Value stocks, after underperforming Growth for the past two decades, are unloved and under-owned. Therefore, there are likely more potential buyers out there than sellers, should the situation improve. This situation reminds me of George Soros’ adage that the worse a situation becomes, the less it takes to turn it around and the bigger the upside.

Of course, it is possible that we could be wrong and that Value continues to underperform, especially if COVID is not eradicated, economic growth disappoints and bond yields go to fresh lows. This could continue to lead investors to favour Growth stocks. Therefore, it would be prudent to maintain some exposure to Growth style, even as we tilt towards Value.

Since the March 2020 lows, Value stocks have underperformed, but they still rose 50% to close the year largely unchanged. Therefore, adding more exposure to this still-unloved area of the market and diversifying away slightly from the area that has risen over 80% in the same period (and over 30% in 2020) probably makes a lot of sense.

Steve Brice is Standard Chartered Bank’s Chief Investment Officer for Wealth Management.
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Tilting towards Value by Steve Brice; Standard Chartered Bank’s Chief Investment Officer for Wealth Management - Brand SpurTilting towards Value by Steve Brice; Standard Chartered Bank’s Chief Investment Officer for Wealth Management - Brand Spur

Latest News

Vivocom’s Group Game Changer – Multi-Billion Sand Project Secured

  • Initial contract worth RM3.79 billion for three years
  • Aspires to be a major industry player 'with exponential growth prospects'
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KUALA LUMPUR, MALAYSIA - Media OutReach - 26 February 2021 - In a filing to Bursa Malaysia this evening, Vivocom Intl Holdings Berhad ('Vivocom') announced that V Development Group via one of its subsidiaries has secured a 'massive win' worth approximately USD934.7 million or the equivalent of RM3.79 billion.

Rain International Sdn Bhd ('Rain International') is a 97% owned subsidiary under the V Development Group which was recently merged into the Vivocom Group. The Company's proposed acquisition of V Development Group had been recently approved by the relevant authorities.

Rain International is principally involved in the mineral trading and exportation business, supplying sand to its client mainly in Hong Kong and China for reclamation and construction works. The Company had recently signed a contract for the supply of marine sand for a minimum period of three years.

The contract is for the supply of sand to Zhen Hua Engineering Company Ltd-China Communications Construction Company Ltd-CCCC Dredging (Group) Company Ltd. (ZHEC-CCCC-CDC), a Joint Venture contractor appointed to undertake the main reclamation works for the Hong Kong International Airport Three Runway System Project.

Director Mr William Chan Ching-Kee said: "As the appointed agent for the ZHECC-CCCC-CDC Joint Venture, we are looking forward to the exportation of sand from Malaysia to our client in Hong Kong to commence without any further delay."

Dato Seri Chia is optimistic that the contract would be extended for another two to three years and could potentially generate revenue of up to RM6 billion.

"The sand business is a major boost because it gives us tremendous visibility. The potential revenue is huge, recurring and highly scalable," its jubilant CEO, Dato Seri Chia Kok Teong exclaimed.

"The potential for explosive growth in the sand business is real and tangible, and bodes well for the Group in the next few years."

"We are starting with 3 years but the contract can easily be increased to 5 years and beyond, with higher tonnage shipped every 6 months. The exportation of sand will increase sharply over time," he added.

Besides the reclamation works for the Hong Kong International Airport, the rapid pace of construction and reclamation works in China and Singapore also requires heavy demand for sand, which is a considerable boon to Malaysia.

"The market for sand export is extremely humongous and will fuel the Group's rapid growth for the next several years. The RM3.79 billion Win is the first of many more to come."

"I have in fact urged my team to secure up to RM10 billion worth of sand contracts by the end of 2021. This is part of our overall transformation strategy to become a multi billions conglomerate," declared Dato Seri Chia.

"It is our core strategy to strengthen and diversify the Group's revenues generation capabilities and capacities and not be too narrowly focussed."

"Presently, we are already in negotiations for another RM2 to RM3 billion sand contract. Once finalised, we will make the relevant announcement as per Bursa Malaysia's requirements," Dato Seri Chia elaborated.

The sand would be procured from an approved permit holder to export sand overseas, and sourced from concession areas in Sandakan and Sungai Beluran in Sabah and throughout Malaysia.

"Even with this massive sand contract already secured, we will not be complacent. I have earlier promised to transform Vivocom into a behemoth Conglomerate and I will work non-stop to deliver on the promise," Dato Seri assured.

Since Dato Seri Chia's entry into Vivocom in January 2020 when its price was at 15 cents, the share has climbed sharply and last closed at RM1.06 on Thursday, 25th February 2021.

"I am very optimistic that Vivocom shares will continue to grow strongly and be worth a lot more than presently over time. I'm proud to say that we are no longer a penny stock," he reflected.

"My team is totally committed to building Vivocom into a reputable and profitable public company, one with solid fundamentals, sustainable profits and healthy cashflows."

"As a priority, we will work towards getting the Group elevated to the Main Board of Bursa Malaysia and be a dividends-paying company soonest possible," quipped Dato Seri.

To show his commitment, Dato Seri Chia has undertaken a voluntary self--imposed moratorium (or SIM) in that he will not dispose his personal stakes in Vivocom for the next 3 years. This will ensure the company's long-term price stability and sustainability.

"We want a stable and strong share price so that the Company can use its shares with its high liquidity as a currency for M&A activities to fund and fast-track expansion and growth," he explained.

"A strong share with high liquidity is a most valuable and prized asset. We will use it to buy Companies with game-changing and disruptive strategies. To look for the Next Big Thing."

"The enormous followings in the Company are what is driving in tremendous liquidity and momentum giving our share price added impetus," Dato Seri proudly asserts.

"We aspire to emulate Berkshire Hathaway strategy started over 40 years ago by Mr Warren Buffet. Mr Masayoshi Son built SoftBank Group of Japan along the same philosophy and Alphabet in US adopted similar strategies."

"These three companies are presently amongst the most valuable and admired companies in the world. I have the same dream for Vivocom. I am determined to leave behind an enduring legacy for all our valued shareholders," concluded Dato Seri Chia.

Tilting towards Value by Steve Brice; Standard Chartered Bank’s Chief Investment Officer for Wealth Management - Brand Spur
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