With growing fears of an artificial intelligence-driven bubble, Many investors feel trapped among the optimists, who say high stock valuations make sense Because artificial intelligence is the greatest technological revolution in history, and so are the pessimists who claim that this time is no different and that bubbles will eventually burst. This trap is exacerbated by the lack of options, as gold, bonds and other safe-haven assets also look expensive.
But there is a once-in-a-generation opportunity in global markets that can be generated Strong returns No matter how AI fever develops. The opportunity is there Quality proceduresespecially those that are priced at relatively low prices. According to MSCI indices, “quality” stocks are characterized by high returns on equity, stable earnings growth, and low debt levels.
At the global level, Only one in five stocks meet the requirements Over the past three decades, these companies have consistently outperformed the market as a whole and other investment strategies such as growth or value. For this reason, high-quality stocks tend to have high valuations. But this is not the case today.
Quality just suffered One of the worst relative declines in developed markets It was about 10 percentage points lower than the broader market over the past year. And in Emerging marketsHigh-quality stocks recorded the worst relative decline in history, leaving 17 percentage points below the general index During the past year.
So, while The average global stock market, which is dominated by the United States, is expensive and trading well above its historical trendQuality sectors are traded in these markets Under trend. Typically, high-quality stocks have achieved their best returns after similar (albeit rare) periods of underperformance. That’s why this moment seems so opportune.
Strangely enough, Quality performance was poor despite significant exposure to big technology. Of the seven great companies leading AI deployment, five have passed “quality” checks. The presence of names like Alphabet and Microsoft hasn’t stopped quality stocks from lagging behindIt did not include any of the low-quality stocks that saw significant gains thanks to liquidity-driven speculation.
Typically, these are low quality stocks They are heavily indebted, unprofitable and volatileThese investments have risen dramatically recently, driven by small investors and high hopes for artificial intelligence. this year, Profitability Of high-quality US stocks Less than one-seventh of those for “unprofitable technologies,” which rose by 70%. Prey to speculative enthusiasm, Investors also ignored many sectors and countries With a large number of high-quality actions, such as, for example, Health and consumable materials In developed markets.
I have a feeling that everything from stocks to gold looks expensive, Some long-term investors are withdrawing from the marketsThey claim that recent price fluctuations are “dangerously irrational.”
Others adopt Defensive positions by holding a large amount of cash, even though this generates low returns after inflation. However, there is a way to achieve decent returns in this environment: Buy high quality stocks. One way to do this is through ETFs With a quality mark, which is listed on various stock exchanges.
However, the best option at this time would be Quality portfolioand eliminate the most overvalued stocks. To find these potential gems, I ranked companies in the US, other developed markets, and emerging markets by “quality,” refining the MSCI benchmark by “quality.” Enhance profit indicators and add a profit growth indicator. I liquidated small and illiquid companies, Subject to volatile price fluctuations or practices that raise red flagssuch as very generous stock compensation packages.
Finally, I selected the stock based on its free cash flow performance and forward price-to-earnings ratio, which excluded most large technology companies with high valuations.
The result is A list of about 400 high-quality stocks trading at attractive valuationsIncluding approx 140 in the United States And some more 40 Chinese companies Listed in Hong Kong. Combinations of these actions can also be found in United Kingdom, Brazil and India. By sector, more than 20% of this high-quality, undervalued category corresponds to The industrial sector, followed by the financial sector and consumer discretionaryto.
If we focus on the most important actions, with With a market value of more than 10 billion US dollarsWe found many very well-known companies. Among the top 30 in each category (USA, other developed markets and emerging markets). Lockheed Martin, CVS Health, Tesco, AstraZeneca, FirstRand and Lenovo. (These results are presented as representative, and not as stocks that I own, manage or recommend.)
On average, the companies on my top 30 list have… Return on equity of 19%compared to 11% overall. They are born a Strong cash flow, a dividend yield nearly twice that of the index, and lower volatility. As a group, they haven’t had more attractive prices since the early 2000s. currently, They are quoted at a 30% discount In terms of the market, a difference that has not been observed since the end of the dot-com bubble.
It is from these minimum valuations, and the use of standard methods to estimate future profitability, that this type of quality can be expected to be generated An absolute annual return of close to 15% over the next three years. This is much higher than the expected returns of other asset classes, Perhaps most importantly, there is no need to think about whether and when the AI fever will end.