Value stocks around the globe for when US markets dive

US markets have had a rocky two days and short-lived rallies at the close were not enough to save investors from significant losses. Yields on US Treasury 10-year bonds have hit all-time highs, with the 10-year yield now above the S&P dividend yield. The DOW closed 1.75% lower, S&P500 closed down 2.45% and the NASDAQ plummeted 3.56%. The AUD/USD soared at yesterday's close to over 0.8004, before returning to 0.7879. 

So, here's the question: Do you buy the dip and let the bull market roar on ... or is this the end of the investor fairytale?

"There's some strange and reckless behaviour in certain pockets of the market," said managing director and CIO of Avenir Capital, Adrian Warner.

"The lack of regard for risk and 'buy the dip' mentality is being driven by 'Reddit-mania'... but a spike in rates is a useful reminder for markets that the risk is real," he said.

On Wednesday, US Fed chair Powell stepped in to reassure markets interest rates will continue to stay "lower for longer". While it may have curbed the freefall, markets still continued to drop and bond yields have edged higher, making investors panicky.  

"I think what we're seeing now is yields have spiked up very quickly and the 10-year has gone up from 90 basis points to 150 basis points. People react to that very quickly and so it's a very twitchy market," said Warner.

The canary in the coal mine 

Warner has been carefully following the investors in high growth stocks, which outperformed markets in the immediate COVID-19 recovery. Investors, like founder of Ark Investments Cathie Wood, have done incredibly well. But the large exposure to high growth and expensive parts of the market are anathema to investors like Warner. 

"An increasing disregard for risk, increasing disregard for valuation and entirely focused on growth happens at the end of every bull market," he says. "There's a lot of money that goes towards what is working, which is the high-growth exciting stories."

"You see that with the enormous number of SPACs which have been listed this year, and the enormous amount of IPO volume. The strength and size of the pullback of some of these high-flying companies is a pretty significant indication - I think there could be more to go if interest rates continue to march up," he said. 

Where to shelter from the storm

As a value investor, Warner's strategy is to find strong cash-generative businesses and avoid the high growth companies that aren't yet profitable. 

He's also avoiding 'dividend aristocrats' - the companies which have attractive dividends of 3-4% every year, but very little growth prospects in the long term. 

"I think that as interest rates go up, those kinds of stocks that don't have a lot of growth will start to feel the pressure," Warner said. 

So, Warner has a "barbell strategy" - a balanced combination of stock ownership, where on one side you have high-quality stocks with a dominant market position that aren't exorbitantly priced. And on the other side, you have stocks with strong fundamentals for a recovery play. 

These, he said, are "compounding machines".

For example, he has invested in: 

• Wuliangye Yibin (000858:Shenzen) a Chinese alcoholic beverage company which is growing very strongly at 20% p.a.
• Vail Resorts (NYSE:MTN) a leading, scaleable ski resort business with a dominant global market position
• HDFC Bank (NSE:HDFCBANK) Warner said he bought this in dip during COVID-19, has compounded 20% per year. 
• Infineon (ETR: IFX) a German semiconductor business that is well-positioned to benefit from electric vehicles (EVs), IoT devices and so on. 
• Buzzi Unicem (BIT:BZU) an Italian cement company, which supplies most of Europe and the US, will benefit from government infrastructure spending.
• Univar Solutions (NYSE:UNVR) a chemical distribution company that Warner is banking on receiving a recovery boost as hospitality venues reopen after global COVID-19 lockdowns.

Conclusion

There is definitely a lot of pressure on growth stocks following the rise in long bond yields. The markets haven't bought into the "lower for longer" script. With a truckload of stimulus on its way - US$1.9 trillion - investors are getting antsy. Markets are trying to get ahead of the interest rate hikes which many believe will follow the excess cash and pent-up demand in the market. So the "all-weather" portfolios, like Warner has advocated, is looking increasingly appealing for global equities investors. 

For more on local markets, check out Bond yields, a shot across the bow for equities. 

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