This is a pattern we’ve seen throughout history. At some point in every bull market, investors come to appreciate the value of previously unloved shares, while demanding more of those in favour. Take Nvidia. Despite reporting results most businesses can only dream of—sales and earnings both grew 120% in a single year—its price fell by 6% the following day. When expectations get too high, good news isn’t good enough news.
Nvidia is not alone. The stocks that suffered most during the recent volatility were those whose valuations—and expectations—were most stretched coming into it.
Our goal is to find the opposite: companies where expectations are low. Companies where good news really is good news, and even bad news can be positive if it’s less bad than expected. This also provides a measure of downside protection—it is far harder to disappoint pessimists than optimists.
In aggregate, the companies in our Global Equity Strategy trade for less than 17 times consensus estimates of next year’s earnings, versus 24 times for the MSCI World Index. In our view, that gap leaves our portfolio with plenty of room for pleasant surprises—and the benchmark with little room for error.
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