In my previous post, I lamented my holding in LRD. Two shares that are working out well for me are investment trusts: BRWM (Black Rock World Mining) and JRS (JPMorgan Russian Securities). BRWM is up 33% since I bought it in Mar 2016, and JRS is up 34% since I bought it in Dec 2015.
So what went right? My answer is: they were value investments based on sector bets; albeit Russia is an entire nation. I was looking for groups that had been smashed, rather than individual companies. My thinking is that although individual companies may be “cheap”, the cheapness may be justified, but if whole sectors have been smashed, then that’s likely to be caused by either cyclical factors or poor investor sentiment.
Russia is the cheapest country by CAPE. (Source: http://www.starcapital.de/research/stockmarketvaluation . I keep an eye on this page!). There’s a good (negative) correlation between CAPE and subsequent returns. Current CAPE levels of Russia suggests that there is still plenty of returns to be had in Russia, and I plan to increase my holdings there. I might not pick JRS, though.
Resources are another area that have taken a battering, and worthy of consideration.
You must pick cyclical sectors, though, not ones in long-term decline, like Polaroid or Eastman Kodak.
Here’s my suggestion for investing in value sectors: look at relative strength by sectors over 5 years. Concentrate on the worst performing sector(s) to buy. I work with median figures, rather than means. Eliminate AIM companies, as they are likely to be just trash. Stick to those companies that have acceptable balance sheets: pre-tax profits less than 3X net debt. Leverage works both ways, of course, but you risk being the nasty recipient of a rights issue. You also want to look for evidence of a turnaround in sentiment: look for a positive relative strength of 1 year against the market (not sector) index.
What should you be looking at currently? Industrial metals and mining has an RS5y (Relative Stringth over 5 years) of -80%, so that would be a good place to start. Mining, oil producers and distributors are also in the dog house, as is electricity. No surprises there, then. Tech hardware and equipment is down 31%, so you might want to take a look at that. To a lesser extent, banks are down 15%.
So I think there are still plenty of gains to be made out of Russia and resources, and I plan to stick with those investments for now.
Stay safe out there.