Undervalued US financials and global value in 2011

by Ashik Shah on 31 July 2011

This letter usually refers to the quarter listed above.  However, given the current market volatility it also makes sense to make some comment on events since the end of the quarter.  The previous two quarters were characterised by positive sentiment with certain doubts creeping in towards the end.  In the months of August and September investors have become very jittery about a number of factors.  Doubts about sovereign debts, particularly Greece and Italy, have sparked fears of further banking meltdown.  Observers were surprised to watch the tragicomedy of US budget negotiations followed by ratings downgrades.  In addition, as lawsuits develop, companies like Bank of America and Citibank have halved during the course of the year.

Kurm Investments has significant exposure to the US Financial Services sector, which has impacted the NAV.  Kurm’s investments in Asia have also suffered as panic has spread, while the African, Japanese and Middle-Eastern investments have not fallen with the markets.  While Kurm has begun to invest in emerging and frontier markets, the focus continues to remain on long-term value investment and some of the companies and managers identified have the characteristics of integrity and alignment of interest which Kurm has always sought.

Nevertheless, current US valuations seem to be extremely cheap.  A casual survey of the US portfolios and discussions with local managers suggest that the underlying companies could actually liquidate themselves and the investor would make at least twice the money reflected in stock prices.  Moreover, the businesses are all actually becoming stronger and have particular niches where they thrive.  Single digit p/e ratios and discounts to tangible book reflect the widespread panic in the markets.  They also represent unique buying opportunities.  Kurm’s North American investments are very well placed for a multiplication of capital invested.

Today’s developed markets do not process information very well.  Thanks to the internet and wide use of blogs, careful analysis has given way to alarmist horror stories, often with great inaccuracies.  Coverage of lawsuits related to Bank of America simply do not understand the actual potential legal liability, but simply describe the plaintiff’s demands or the total pool of mortgages written, despite the fact that many have already been repaid.  In this climate, rational and patient analysis, investment of patient capital and a focus on long-term fundamentals will enable true investors to ignore speculation and to make opportunistic investments.

In South-east Asia, Kurm has a portfolio of very unique business in countries like Thailand, Indonesia, Singapore, as well as others.  Some of them are actual global leaders in their respective fields.  Trading at single to low double-digit earnings multiples, with robust growth ahead of them, these companies are valued very cheaply.  In Africa, Japan and the Middle-East, as well as Russia and Central Asia where Kurm has small investments, the valuations are also low for unique businesses.

Fears of EU disintegration, debt crisis, lack of growth and concerns about deflation and inflation can draw focusing away from the underlying businesses and valuations.  As ever, any family wishing to preserve and grow capital will be served well by objective, contrarian, value-driven, long-term focused investment.  Today’s markets offer unique opportunities.

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The views expressed and comments made on this website are not personal advice based on your circumstances. The purpose of this website is to provide information and analysis to help you make your own informed investment decisions. If you are not confident making your own investment decisions you should contact a firm which is authorised and regulated by the Financial Conduct Authority (such as Ashik Shah & Co. Ltd.) so that a qualified financial adviser, after considering your personal circumstances and investment objectives, can make personal recommendations of investments which are suitable for you. Whether you make your own investment decisions or prefer to follow the recommendations of a financial adviser you should always remember that your capital will be at risk and that investments can go down in value as well as up.

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