January 20, 2020 / 5:12 PM / a month ago

Wincrest, net short U.S. stocks, says lofty valuations dangerous

(Reuters) - Emerging markets are the “anti-bubble” to increasingly expensive U.S. stocks, Barbara Ann Bernard, founder and chief investment officer of asset manager Wincrest Capital, said on Monday.

FILE PHOTO: A trader looks at a screen that charts the S&P 500 on the floor of the New York Stock Exchange (NYSE) in New York, U.S., April 27, 2017. REUTERS/Brendan McDermid

Lofty equity valuations of companies like Apple Inc (AAPL.O) were dangerous, Bernard, whose investments include Saudi Arabian gyms and Indian shoe maker Relaxo Footwears Ltd (RLXO.NS), said in an interview in the Reuters Global Markets Forum.

Although the trend toward passive investing threatens the process of price discovery, it creates opportunities for investors willing to bet on overlooked stocks, Bernard said on the eve of the annual meeting of the World Economic Forum in the Swiss ski resort of Davos.

Below are excerpts from the interview:

Question (Q) - Which countries do you find value in currently? Do emerging markets look appealing to you?

Answer (A) - Absolutely. Our fund is currently net short the U.S. market, not because we don’t like the United States as a country, but rather, because we find twice the growth at half the multiple in Europe and emerging markets.

Last year, the earnings of the S&P 500 .SPX were flat. Yet its price-to-earnings multiple (P/E) expanded from 14 times earnings to 19 times by year-end. People are paying more for less there today.

As value investors, we are interested in paying less for more and are agnostic as to where we look for that opportunity.

Q: What is your view on the FAANG group (Facebook, Amazon, Apple, Netflix and Google) of stocks, and in general, on U.S. tech valuations?

A: Things can be popular or safe, but in my experience, they are rarely both. FAANG is popular, but it is expensive, which makes it dangerous.

Today, the emerging market consumer is the “anti-bubble” to FAANG. For the market cap of Apple, you can buy every company in the four largest southeast Asian economies.

It is not normal, nor rational, to believe one company has a brighter future than several countries combined.

Q: What are your thoughts on quantitative easing’s (QE)impact on value investing?

A: QE has distorted all valuations, not just in the public markets. With cheaper money, higher P/Es can be justified. But should they when you can still buy other markets at a discount with more growth and better yields?

You might have to look farther and work harder to uncover value today, but the harder we look the luckier we get.

Q: What is your view on the gradual fund flow from active investing to passive investing? Will passive flows eventually create more bubbles?

A: Today over 50% of the market is held by passive investors; three companies comprise 80% of that market share. I worry that this is eroding price discovery. I worry that more and more people are crowding into a room, but the exit door is still the same size. We have seen them indiscriminately buy, but we have not seen them sell.

At the same time, this is creating great opportunity. 80% of the positions in our fund are in no major index. We have adopted a private market approach to public equity markets.

Reporting by Divya Chowdhury in Davos, Savio Shetty in Mumbai, and Lisa Mattackal in Bengaluru; Additional reporting by Svea Herbst-Bayliss; Editing by Alexander Smith

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