Investment bank Goldman Sachs says the current global negativity is providing plenty of opportunity for value hunters.
"The recent market weakness should provide good risk-adjusted opportunities for those brave enough to defy Mr Market's gloomy prognosis about the world economy," said the investment bank's chief economist Jan Hatzius in a report.
Since the start of 2016, the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) is down 10%, including 1.3% today in early trading – and following the leads from overseas markets.
The investment bank's view is a bet that the rest of the market is wrong, with global markets sliding, long-term bond rates falling and higher credit yields signalling what the crowd thinks. Markets appear to be pricing in a high probability of developing countries falling into recession – but Goldmans thinks there's a tiny chance of that.
The investment bank's model shows the risk of recession for the developed market at just 25% over the next two years – below the historical average of 28%. The risk of a recession in Australia is just 13% compared to a long-term average of 23%.
Some renowned Australian investors are already taking a dip into unloved sectors of the market. John Sevior of Airlie Funds Management is looking to invest in resources companies for the first time since 2012, according to the Australian Financial Review (AFR).
However, Mr Sevior singled out BHP Billiton Limited (ASX: BHP) as one company he was unlikely to invest in – partly because of the company's 'foolhardy' progressive dividend policy.
Some of the companies he'd like to top up on if share prices fall further include DuluxGroup Limited (ASX: DLX). At the current price of $6.46, Dulux shares are trading on a P/E ratio of more than 20x earnings. Hardly a cheap price for a company leveraged to the building cycle, which may be approaching its peak.
Another Mr Sevior says is expensive is Caltex Australia Limited (ASX: CTX) as the energy giant nears its transition from an oil refiner to a petroleum product retailer. Caltex is trading on a P/E ratio of more than 44x at the current price of $36.42.
Foolish takeaway
Investing contrary to the crowd and buying shares when prices are cheap is how long-term value investing works. But stick to the quality companies with low levels of debt and the ability to grow earnings under many conditions.
