Market volatility, while unnerving, can also bring asset prices down to attractive levels for buyers. But cheap doesn't always mean good value. Two BlackRock value investors weigh in.

The latter portion of 2015 and the beginning of this year brought heightened volatility to many corners of the financial markets. Whether it was concerns about China’s growth, the collapse in commodities prices or the potential for a U.S. recession, many investors were showing little interest in stocks.

But equity markets rebounded handily, offering a valuable lesson: While market selloffs can be painful, they can also restore value in certain places, providing an attractive entry point for opportunistic investors. The trick is determining which investments are undervalued, and which are cheap for good reason.

Cheap doesn’t always mean “bargain”

“We look closely at the fundamental drivers of individual stocks, knowing full well that cheap stocks can stay cheap forever without a catalyst to drive them higher,” says Bart Geer, portfolio manager of the BlackRock Basic Value Fund.

Mr. Geer notes that the early-year volatility created attractive valuations in certain areas of the market. Indeed, by producing dislocations in the market, volatility effectively separates the potential stock winners of the future from underperformers.

U.S. value stocks have outperformed over time
Growth of $10,000, 1979-2015

U.S. VALUE STOCKS HAVE OUTPERFORMED OVER TIME

The veteran stock picker cites the energy sector as one area with significant pricing dispersion. “An investor grab for high-quality, low-risk stocks without regard for valuation or risk/reward has created some attractive long-term opportunities elsewhere in the sector,” he says.

But buyer beware: “Determining which of the low-priced names are true bargains requires a deep understanding of each industry and company. Many energy stocks will continue to underperform.”

Central banks’ role

These days, a discussion of volatility and value must consider the role of the Federal Reserve and other central banks around the world. U.S. monetary policy that drove risk-asset prices higher and dampened volatility is likely nearing the end of its useful life.

“The balance of economic data, while soft in some areas, does not suggest an impending global recession,” says Dan Chamby, portfolio manager of BlackRock’s Global Allocation Fund. “But markets are not the same as economies, and while the economy may hold up, markets have a mind of their own.”

Security selection is crucial today. Investors can no longer rely on a rising tide to lift all boats.

                          — Richard Turnill, BlackRock Global Chief Investment Strategist

The dominance of quantitative easing over the past seven years, along with the extremely narrow market breadth, has been challenging for value-oriented investors. Mr. Chamby welcomes the return of a more normalized environment.

“With risks more prevalent and returns harder to find, what worked in the past may not work going forward,” Mr. Chamby says. “Looking ahead, it's an opportunity for security selection and currency management to drive performance.

As active managers and value seekers, it’s something both Mr. Geer and Mr. Chamby embrace.