Using this approach, it is clear that the market is not a homogenous lump but, rather, provides a range of investment options.
While technology and consumer discretionary companies appear very expensive, consumer staples and healthcare are significantly more attractive and could provide valuable diversification benefits, if investors become sceptical about valuations or the future profit outlook of the more highly regarded companies.
However, sticking with these less popular companies is hard, as the more attractive valuations they offer almost always arise due to the fact they have lagged their peers.
When times are difficult it is more than usually important to have a set of guiding principles to aid decision making.
While we may never create principles as profound as those found in the declaration of independence, we can at least agree the ‘self-evident’ truth that it is better to look for an asset trading at a bargain price with low expectations than an expensive asset with high expectations.
Dan Kemp is chief investment officer Emea at Morningstar Investment Management Europe
