Written by Orbis Investments
Recent market shifts suggest we’re moving towards an environment that could be beneficial for long-term bottom-up stockpickers willing to stand out and take a different view.
Over the summer a US jobs report, a Bank of Japan meeting, and a slew of earnings releases triggered volatility in global equity markets that may have caught some investors unawares. But while we keep abreast of the headlines, as long-term contrarian investors we focus instead on what we are good at – analysing individual businesses.
Our contrarian approach leads us towards “value” shares trading at low prices, and away from “momentum” stocks that have recently performed well. But in the golden moments when the two are aligned, it can be a powerful tailwind for our process and approach. Recent market shifts suggest that we may be moving towards an environment that is beneficial to different parts of our portfolio.
However, there is a fine line between being contrarian and just being contrary. Just being contrary would be buying everything that’s recently done badly. Being contrarian means we do our homework to sort the wheat from the chaff.
For example, we have had a very different view on energy for quite some time. That includes traditional oil and gas, as well as companies exposed to the energy transition. There, rather than focusing on the big names, we look to explore all parts of the value chain. In particular, the makers and suppliers of the critical energy infrastructure – all the boring bits and bobs that are essential in keeping power grids running.
In this instance, doing our homework led us to a contrarian but also common-sense view: that the big plans of the energy transition would face some stumbling blocks when hitting the scientific realities of physics and chemistry, the economic realities of higher energy costs, and the social realities of political discontent.
Regardless of the progress of the world’s commitment to decarbonisation, there are some things that we simply cannot do without if we want electricity to keep powering lights, machines and industry.
In the western world we have electricity grids that were built after World War II and are starting to fall apart due to the demands being placed on what are, in some cases, 70 year old wires.
Our electric grids are ageing and need replacing
Source: Nexans Data as at 31 Jul 2024
So even if we disregard the wave of demand growth coming from power-hungry AI data centres, even if we ignore the many challenges caused by renewables’ intermittency, even if we ignore the need to transfer power from faraway offshore wind farms to where people actually live, the world still needs to invest heavily in the ageing grid to avoid wildfires, load shedding and blackouts.
That means bigger budgets for the makers of all the behind-the-scenes equipment – cables, turbines, transformers and switches – which are good quality companies but are still objectively “cheap”.
But that’s just one area of the portfolio. By region, UK companies remain an attractive opportunity. Anywhere else, the UK’s small-caps would attract mid-cap valuations, and the mid-caps would attract large-cap valuations, but the UK market is heavily discounted. Even so, selected names in the FTSE 250 are starting to outperform the mighty Magnificent Seven.
This means investors are going to pay attention at some point, but for now there is still little excitement. Yet British industry is great, and some British companies are great. That greatness extends past their bargain price multiples—to their equally-appealing dividend payouts, competitive moats, and intellectual property.
While themes such as energy are gaining more traction in the wider market, the opportunity for UK equities is really just at the beginning. We’ve had positive earnings results in some of our names, and they’re still selling for less than ten times earnings.
Moments like this are tricky for contrarians. We feel both the satisfaction of knowing that our approach is working, and the fear that our stocks are no longer as discounted as they once were.
But as multi-asset investors, we are not limited as to where we can invest. We can hold – or not hold – what we believe will play the right role in the overall portfolio. We both hope and expect that our holdings will follow unique journeys that are idiosyncratic compared with the wider market.
We’re contrarian value investors, so we tend to hold investments that the market doesn’t like, and it’s not always easy. There are times where we, as humans, need to hold our nerve. Sometimes the hardest decision for us to make is to sit on our hands. Being consistently contrarian takes a structure that lets us hold on for the long-term, even when skies are dark. We have that at Orbis.
Being contrarian and patient means our portfolios are both diversified and diversifying—phrases often uttered, but not always well-understood. For us, “diversified” means that no matter how eventful things get in markets, our bottom-up stockpicking should allow us to weather the worst of the storms to the benefit of our clients.
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Disclaimer
For professional investors only. Capital at Risk. The Orbis OEIC Global Equity Fund, Global Balanced Fund and Global Cautious Fund do not have sustainability labels and do not meet the criteria to use a UK sustainable investment label.
Approved for issue in the United Kingdom by Orbis Investments (U.K.) Limited, which is authorised and regulated by the Financial Conduct Authority. Orbis Investments (U.K.) Limited is incorporated in England & Wales under company number 8138002. Registered office address: 28 Dorset Square, London, NW1 6QG.
