For institutional investors, valuation reviews will be critical in navigating equity market uncertainties, said Amy Chang, managing director and head of active global fundamental at the British Columbia Investment Management Corp., during the Canadian Investment Review’s 2023 Investment Innovation Conference in November.
“I think this focus on business quality and looking at individual opportunities is where it’s at. . . . Because I think mathematically, you’re going to have better downside protection in terms of higher interest rates.”
The BCI holds $233 billion in growth assets under management. Since 2018, its public equities exposure has grown to $60.9 billion and accounts for 28.3 per cent of net assets under management, as of March 31, 2023.
When it comes to digging deeper into valuations, the BCI examines intrinsic valuations and runs a discounted cash flow to all their holdings as well as reviewing historical and relative valuations.
“We’re looking at industry attractiveness, whether it be competitive advantages, the business itself in terms of [whether they’re] generating long term sustainable returns [and] their capital intensity . . . and then we’re choosing that best intersection of quality and value.”
While institutional investors have favoured the performance of U.S. equities, Chang said valuations in the market are rising. In addition, there’s a significant amount of volatility to consider, particularly in the tech sector. By comparison, valuations in the international landscape are currently lower, offering a significant amount of opportunity for upside growth.
“There’s this valuation dispersion that we’re seeing between the top valued companies and the lowest valued companies. If there’s that crowding, there’s got to be an opportunity within that and we see that at a very wide point and it’s very attractive.”
However, not all international opportunities are currently attractive. “There [are] a lot of good prospects but Europe is facing different drivers; for example, they’re in a recession. Another piece is that the companies actually aren’t attractively valued and you can see not only that prospect being less compelling but trading at more expensive valuations.”
She also pointed to the evolving role of inflation and the uncertainty around current geopolitical risk as two ongoing macro themes adding pressure to the equity market. Moving forward, the BCI will be keeping a close eye on investment themes surrounding the automobile industry, industrial spending boosted by legislation in the U.S. and the increasing residential housing demand.
“The average age of a home in the U.S. is 40-plus years . . . . There’s a lot of pent-up demand in terms of housing [renovation], especially for single family homes.”
Read more coverage of the 2023 Investment Innovation Conference.