Our aim is to buy into robust demand themes over the long-term where earnings are more sustainable than in low-margin, capital and labour-intensive businesses.

DCF or discounted cash flow analysis is a commonly used valuation tool for equity.

 Discounted cash flow (DCF) is a valuation method used to estimate the value of an investment based on its expected future cash flow. DCF analysis attempts to figure out the value of an investment today, based on projections of how much money it will generate in the future. This applies to both financial investments for investors and for business owners looking to make changes to their businesses, such as purchasing new equipment.’ Investopedia

You could also use that acronym for Discounted Country Factor.  While we at T. Bailey are thematic investors, our aim is to buy into robust demand themes over the long-term where earnings are more sustainable than in low-margin, capital and labour-intensive businesses dependant on volume multiplying thin margins.

We also have a preference for acquiring cheap assets and trimming those that become expensive.  Just because a price has fallen, it doesn’t mean that an asset is worth buying. It might stay cheap, especially if it’s in a challenged industry or theme – like offline retailing for example.  Despite preferring themes to geographic allocating, there are times when countries trade at a discount to their absolute and relative value.

Some years ago, while I was a regular attendee of a strategic investment committee at a well-known asset manager, the view was that Russia was a cheap equity market.  The resident expert quickly pointed out that it should be about 30% cheaper compared to other equity markets because of the lack of democracy and governance in the Russian stock market.  You could say the same, although not to the same margin of discount, about many strategists’ current favourite equity market – China.

Indeed, for those index-huggers in the investment community who extol the attractions of ’emerging market’ equities, the MSCI EM Equity Index is dominated by Asian exposure (China, South Korea, Taiwan and India represent 75% of that index) and 39% of the MSCI EM Equity Index is represented by China.  While Asia may become the dominant growth region looking forward, it could be argued that China should trade at a discount to other ‘EM’ or developed markets?

In the developed world, you could also argue that both Japan and the UK have traded at discounts in recent times.  Japan has often been unloved by non-Japanese investors and may suffer from some sort of earthquake discount too.  Yet, Japan is a leader in robot technology and has a number of interesting companies that dominate globally.  Most UK investors have heard of or may have used Indeed (to look for jobs) which is actually owned by Recruit, a Japanese company.  Additionally, under the previous Abe-led government, Japan has pursued a much-needed corporate governance and reform agenda to the benefit of company shareholders.  The Japanese yen has also proved itself to be a diversifier in bouts of market volatility.

Another unloved country trading at a discount to other markets has been the UK, where politics and in particular, the Brexit withdrawal agreement has dampened both international and domestic appetite for UK equities.  While the full ramifications of the withdrawal agreement may take a while to become apparent, the UK market has enjoyed a bounce since the start of 2021.  What is appealing about the UK market (beneath the FTSE 100) is the diversity of small and mid-cap companies that are financially robust and give exposure to the long-term demand themes we seek – healthcare, technology, cybersecurity for example.



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