Market expectations about what policies might look like versus where those expectations are today and where they might be in the future are quite different. And to invest on the assumption that you know what’s going to happen is a problematic exercise.
I think the biggest issue that we have in terms of looking how the marketplace has valued stocks relates to what I would characterize as the certainty at which the market has asserted both policies that will occur and the benefits that will accrue to stocks as a result of those policies. And so when you looked at the market reaction right after the election, you saw a very strong rally of a lot of stocks on the assumption that they would be beneficiaries.
Where we part company with the market and where we disagree: in our view, the market was sort of overly certain, overly confident, not only of the fact that these policies would be enacted but also of the benefits that might accrue to the stocks, especially given the more competitive nature of some industries.
And so our approach hasn’t changed. When we’ve looked at how we’ve approached the stocks before the election and after the election, we continue to be focused on bottoms-up company-level fundamentals, because our view is that’s an area where you can still find truly differentiated companies with attractive valuations. And what we found—where we’ve been less able to find values are in stocks where the market has had these very strong policy perspectives that have bid the stocks up.
We definitely acknowledge the idea that if these policies do come to pass that some of these stocks will be beneficiaries of that. But we disagree with the market, both in terms of its confidence and its certainty about not only, as I said, the timing but also the magnitude of the impact of some of these policies.
The opportunity set as we see it—and again we’re bottoms-up investors, and so we’re finding individual stocks everywhere, but this is where we’re finding more of our stocks—are in areas like industrials and like technology, where investors have, in our viewpoint, overlooked individual companies that have those really strong free cash flows, those very attractive earnings power, those very attractive company-level catalysts, strong balance sheets and the like, that allow them to be well-positioned to succeed, not regardless of the environment, obviously, but they can do a lot of self-help and they can be successful in most investing environments.
I would caution investors to be mindful of what exactly you’re paying for when you’re buying a stock, and to sit back and to assess how confident are you really that those outcomes are going to come to pass, because that’s at the end of the day what’s going to generate your investment returns.
The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AB portfolio-management teams.