Jamie Nicol, DNR’s chief investment officer, said while he expected this market instability to continue, the underperformance gives investors the opportunity to buy undervalued stocks.
The S&P/ASX 200 Accumulation Index fell by 4.5 per cent in May, but according to DNR’s analysis, stocks are still trading at a 20 per cent discount on what they were two months ago.
One area in which the firm believes opportunities are returning for investors is the resources sector, which has taken a hit since it reached its highs in 2012.
“Over the past year, we have seen resource companies substantially underperform defensive yielding companies. It’s our view that conditions are shifting and that this will enable some of the leading resource companies to claw back some of this underperformance,” Mr Nicol stated.
DNR also sees considerable positivity in the recent fall in the Australian dollar which, it said, adds around 8 per cent of profit to the market and is another reason “to support those companies with offshore earnings”.
The firm said investors can exploit domestically-orientated stocks exposed to potential cuts in cash rates.
“One other area in the domestic economy that is showing signs of life is the housing market - especially if interest rates are lowered further - and there are a range of companies that can benefit from greater housing activity levels,” Mr Nicol said.
The research house uses a five-point matrix to identify value in the market that assesses companies’ balance sheets, industry structure, management, earnings strength and environmental, social and governance risks.
“[Our] research on quality investing has largely focused on the back testing of various quality screens to determine the impact of quality on returns,” Mr Nicol said. “On the whole, this research has shown a strong linkage between quality and performance over the medium and long term.”
