Undervalued asset classes overlooked

SMSF investors should consider undertaking research to understand undervalued individual asset classes rather than trying to find specific underpriced stocks to shave off risk.

That was the recommendation from AMP Capital head of dynamic markets Nader Naeimi, who said investors should use the notion of value investing for asset classes rather than individual assets to help reduce risk.

When an asset class is undervalued, it is priced below its earnings and income growth potential, with potential for it to grow or produce more income than is currently perceived by market investors.

Naeimi cited Warren Buffett as an example of someone who bought financial services businesses during the peak of the global financial crisis of 2007/08, which was beneficial to him as the industry’s performance improved over time.

“The analysis you do is a lot more detailed when you’re executing value buying at the company level because you have to understand the companies in great detail to ensure you’re really buying a value asset. It’s essential you’re not buying into a value trap,” he said.

“Whereas when you buy at the asset class level, for example, buying a sector such as banking, you don’t need to understand the ins and outs of each stock. It’s also unlikely the sector as a whole will go bankrupt and that reduces risk.”

He cited the energy sector as an example where assets are undervalued due to pressure on oil prices.

While market sentiment has mainly focused on the rise of new technologies, such as electric cars reducing the demand for oil, this overlooks continued demand for oil used in areas other than vehicles, such as aviation, agriculture, forestry and manufacturing, and this is expected to continue unabated.

Naeimi said understanding why an asset is undervalued is important and market sentiment is often a reason.

“When you’re buying things that are undervalued, ensure the situation is not going from bad to worse,” he said.

“Look for asset classes with strong improvements in underlying fundamentals and the potential for strong future revenue streams and don’t be afraid to have the courage of your convictions.”

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