Paper on Equities Asks: If Not Now, When?

(February 22, 2012) — Valuations for equities in the United States are now at highly attractive levels on a long-term basis even though the environment for the asset class on the surface looks to be poor, according to research by UBS Global Asset Management.

The paper — titled “Equities: If Not Now, When?” — concludes: “Most encouragingly, as we have sought to demonstrate, valuation spreads are unusually wide and seasoned investors have been taking advantage of the recent market turmoil to acquire stocks at very substantial discounts to what we believe is their true underlying worth. With such opportunities, we believe the stage is set for investors who focus on fundamentals to deliver active returns.”

Amid heightened market volatility — agitated by the eurozone’s worsening state — the paper urges investors to keep active. “Active investment managers are typically hired to take positions that differ from the market with the aim of adding value by exploiting inefficiencies. Dispersion of security returns is a basic measure of available opportunity and is related to the concept of breadth, which, coupled with skill, enables a manager to generate value,” the paper says. Ultimately, the authors conclude that managers who take bigger active risks stand a better chance of winning compared to ‘closet indexers.’ Furthermore, the manager selection decision remains a very important one to get right.

Additionally, the UBS paper explains that the market has resulted in a flight to perceived safety, creating additional opportunities for active investors. “The flight to safety and elevated level of market volatility have pushed valuation spreads back to very high levels…The good news is that a very high level of valuation spreads is an excellent forward-looking indicator of stock selection opportunities,” the paper explains. 

Meanwhile, the paper urges investors to not forget the risks of equities, noting that “our central view remains that the crisis will be ultimately resolved, though the timing and execution remain unclear.”