The shocks that show valuations could catch up with the US

DeepSeek challenges the dominance of the Silicon Valley technology giants. Tariffs are a geopolitical tool removed from economic convention. They erode the free-trade infrastructure that underpinned globalisation (the growing interdependence of the world's economies) and acted as a deflationary force (pushing down prices) for many years.

While the US president postponed tariffs on Canada and Mexico just days after announcing them, it goes to show stockmarkets are facing a series of powerful and rapidly moving crosscurrents. I am writing this while the US sleeps because that is my only way of being confident of reaching the end before things change, so feverish is the mood prompted by Trump’s return to the White House.

I am writing this while the US sleeps because that is my only way of being confident of reaching the end before things change, so feverish is the mood prompted by Trump’s return to the White House.

I am writing this while the US sleeps because that is my only way of being confident of reaching the end before things change, so feverish is the mood prompted by Trump’s return to the White House.

The impact on markets

The Nasdaq (a US stockmarket with a high concentration of technology shares) bounced quickly back to where it was before the DeepSeek strike, but Nvidia and other chip companies have not¹. Software has done better than hardware after a recent period of underperformance.

Either way, a whole new debate has emerged more or less out of the blue sparked by low-cost Chinese copycats (something we have seen in so many sectors in recent decades).

I have to be careful not to sound like I am seeing bubbles (where the price of an asset is driven up by sentiment until it vastly exceeds its fundamental value) and calling an end to the stockmarket dominance of the Magnificent Seven (Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla) and technology shares in general.

There is a saying that a bubble is something you don’t own that keeps going up in price. I don’t own any of the Magnificent Seven, which could make me sound very petulant.

I do not own them because I am an income investor with a strong focus on valuation. They are great companies but they do not pay high dividends and I think the shares are expensive.

Importance of valuation

What I have found as a fund manager over the years is that the prism of income and value investing (investing in companies that appear undervalued relative to their share price) can open a world of opportunities for investors interested in building a broader base to their portfolio.

And the important word there is, perhaps, ‘world’. In the past two years the North America exposure in our fund has fallen from half to a third. That compares with 66% of the MSCI All Countries World index². Our fund trades on half the price-to-earnings ratio (a key valuation metric calculated by dividing the share price by a company’s profit per share) of the market³ – and that is after topping its sector over one year.

Experience suggests that if there is a sell-off in markets, a low starting valuation usually helps. So where do I see the best opportunities for investors looking to mitigate the confusing array of risks we now face?

Where can you find value?

A quest for income-paying stocks in under-appreciated areas has led us to be overweight (a higher-than-average position) in Europe (29% of the portfolio) and Japan (10%). That’s where the dividends are high, often accompanied by share buybacks⁴ at decent valuations.

A quest for income-paying stocks in under-appreciated areas has led us to be overweight (a higher-than-average position) in Europe (29% of the portfolio) and Japan (10%).

Europe is widely regarded as a difficult place for investors while war is raging on its doorstep. But European defence shares have done well and still hold attractions in a more dangerous world. Consolidation is propping up valuations of European banks. Share buybacks and strong dividends mean banks are often returning a combined 30% or more of their value to shareholders in just two years⁵.

In our top 10, we hold Germany’s Commerzbank, as well as the Italian bank BAMI. Both have sought to rebuff takeover interest from UniCredit of Italy. All you need in Europe is for the economy not to be quite as bad as people think for a bounce – as we saw in January.

Financials generally still look promising and we have an overweight to this sector. After a good run, such a big exposure does present risks – especially if there is a recession or increased market volatility. Trump’s tariffs could be a catalyst for an unintended slowdown of the economy.

Higher for longer

That said we believe interest rates will be higher for longer and inflation stickier than central banks would like to admit. This boosts lending margins (the difference between the interest charged on loans and that paid on savings accounts) at institutions which long ago repaired their balance sheets in response to the 2008 global financial crisis.

Having managed to make money when interest rates in their country were zero or negative, shares in Japanese banks have risen quickly, with the cost of borrowing this month hitting a 17-year high of just 0.5%⁶, and the Bank of Japan signalling more increases to come. Even so, their shares are inexpensive, trading around book value (the value of the underlying assets if the company were sold)⁷. Beyond the banks, Japan benefits generally from shareholder-friendly reforms – and big Japanese companies are now buying back shares.

The world has just got more uncertain. I do not know if recent events will trigger a change in stockmarket leadership (but I do hope they will). Nor do I know what impact they will have on the global economy, but they may sound a warning note to investors to review their portfolios and to put more value on value.