By the middle of this decade, we will likely be into the next phase of potentially lower global carbon emissions with the continued replacement of higher emission energy (coal) with lower emission options (natural gas). We will likely see North America solidified as a global cleaner energy exporter and energy independence also may occur within this timeframe. We believe there are plenty of investment opportunities within the energy space that will help the world reach this next phase, but patience is required.
As value investors, we are often asked (sometimes more often than we would like!) how our investment process avoids the well-known value trap. So, at the 2023 Value Investor Conference held in London, when Ben Inker of GMO spoke about a little-known concept – that of growth traps – he confirmed our long-held suspicion that growth stock disappointments can be bigger threats to investor portfolios than the oft discussed value trap. His analysis piqued our interest.
Lessons from history suggest investors should rebalance their excess allocation to growth down to an underweight, or at least a balance with value. Many investors who do not recognize a "regime change" has occurred in the market, largely appear to be discounting growth's underperformance as temporary. Some are justifying inaction with comments that the revaluation has largely occurred, thus it is too late to switch. But as we all know, the early bird often gets the worm (and the most excess returns).
The year 2022 is shaping up to be one that many investors would like to forget, given the volatility and negative performance of equity and fixed income markets. With the declines witnessed to date, many investors are asking, “Are we there yet?”.
Recent actions in the global financial and economic landscape suggest that a regime change may be upon us. Today’s change centers around inflation and interest rates but could also be extended to wider issues such as deglobalization and decarbonization. The focus of this piece will be on regime change as it pertains to financial markets.
When there is an unusual amount of uncertainty and nervousness in the market, there is a tendency to reach for more – more data, more analysis, more answers. But having more is neither efficient nor effective. Time is a finite resource. And more information does not necessarily equate to better decisions. We cannot model every scenario, let alone every risk. One must determine the most relevant and important information, manage the most detrimental risks, and move forward cautiously.