8 Insights from David Flynn's Talk
Updated: Feb 12, 2021
David Flynn chief strategist of Baggot Investment Partners joined us on Tuesday evening to talk through where he sees value in the markets right now and where he believes is worth avoiding. Please note these are just my brief notes of his talk and check out Baggot investments or contact David/Peter for further info. As always i am not a professional investor and please always do your own research as well.
1. Buying value: We were reminded of the Warren Buffett quote ‘“Price is what you pay. Value is what you get”. If you buy an undervalued stock it will be a lot easier to get a return than an overvalued stock. The evidence he presented showed proof that for longer term investors, Value Investing provides better returns for lower risk.
2. Expensive market: David believes American shares look overvalued using his valuation screens which encompass CAPE, Price/Sales Ratio, Price to Earnings, Price to Cash, Price to Book ratios and Dividend Yields. He noted that Irish and European investors in many popular investment products have 55-60% of their Equity investing exposure in the extraordinarily overpriced US market.
3. Cheaper valuations: Some of the markets looking the cheapest with these valuation metrics include Russia, South Korea, Austria, China and the Czech Republic. However he caveated that while Russia might look very cheap, it can be a very precarious place to invest. For anyone looking for further examples of this, Bill Browder’s book Red Notice chronicles the chaos and corruption that exists investing in Putin’s Russia. Many European and Emerging Markets, the UK and Japan showed very attractive valuations in his screens. He mentioned that Baggot Investment Partners have sourced an exchange traded (CGT tax treatment) Emerging Market instrument that trades at a 12.4 discount to its Net asset Value (like getting extra strokes on the tee box).
4. Bonds: David cited that he believes that some countries bonds are exorbitantly expensive. US stocks haven’t been as attractive relative to US bonds since the 1940’s and that is with stocks at record highs. It thus further illustrates how expensive bonds are trading at right now. If you were to calculate them using the price to earnings ratio of shares, that Irish bonds for example would have a P/E ratio of 1000. However Brazil’s 10 year bond yield is 7.35% which works out a P/E ratio of 13. Brazil has lower debt levels, significantly better demographics and interest rates at a level that allow their central bank more flexibility than we have in the West,
5. Precious metals: gold has outperformed equities and bonds over the last twenty years. David expects that outperformance to continue over the next 12 – 24 months because there is not much incentive to hold developed market government bonds with interest rates yielding nothing. He noted that it has been real money for 6000 years and that it is valued in something that is infinitely printable (paper money). He also pointed out that money supply growth has been dramatic this year! He pointed out that most Gold ETFs do not offer a real claim on physical Gold, even many with the term “Physical” in the name. He offered up that Baggot Investment Partners are providing clients with an exchange traded (CGT tax treatment) instrument that is actually physically redeemable and therefore a real claim on physical Gold.
6. Commodities: David pointed out that commodities and companies in that space look very attractively priced from a longer term perspective.
7. Social housing over Commercial Real Estate: Commercial Real Estate looks like it is in for a rough ride, David sees more opportunity (particularly for income seekers) in the Social Housing space, where you can generate government guaranteed income for 10 – 20 Year periods.
8. Inflation: David is concerned regarding inflation and more so about inflation than deflation because of how much money has been printed; i.e five times 2008 already. He has concerns about the potential for rapid debasement of purchasing power. The Tehran Stock Exchange (TSE) Index is a classic example, there is no fundamental (Oil) case for the stock market to rise there, yet it has more than doubled since the March lows. This is the power of rapid money supply growth.