Posted on: October 14, 2022, 02:26h.
Last updated on: October 14, 2022, 04:20h.
Asset allocators are increasingly ignoring gaming stocks, even as those shares decline, potentially signaling missed value opportunities.
That’s according to Morgan Stanley’s 2022 Global Investor Survey, which indicates 29% of investors are glossing over gaming equities this year, up from 24% in 2021. The poll queried 320 investors, including hedge funds, institutions, and retail market participants.
The bank notes that it’s mostly long-only fund managers who are eschewing shares of casino and sportsbook operators, while hedge funds remain engaged with the asset class. Still, gaming is one of the most excluded industries.
Gambling is the fourth most excluded sector among investors, ahead of military equipment and oil and gas,” according to the Morgan Stanley survey.
As environmental, social, and governance (ESG) investing gains popularity, particularly among institutional investors, it’s possible the audience for gaming stocks is narrowing. That’s because that style of asset allocation relies heavily on excluding some industries. Those include alcohol and tobacco, civilian firearms makers, fossil fuels producers, and gaming, among others.
Europe and ESG Rough Mix for Gaming Stocks
Due to Europe’s wide embrace of ESG, the continent could be an epicenter of exclusion for gaming stocks from traditional long-only funds. ESG investing is an increasingly popular style among money managers and retail investors. Many of the equity benchmarks that adhere to ESG principles intentionally exclude specific industries.
As Morgan Stanley notes, investors that have to follow guidelines set forth by the European Union’s Sustainable Finance Disclosure Regulation (SFDR) are likely to find it increasingly difficult to allocate to companies with ties to wagering.
“We think the exclusions are applied mostly by European investors,” said the bank.
That represents a conundrum of sorts because Europe is home to some of the largest non-casino gaming companies in the world. Those include sportsbook giants Entain Plc (OTC: GMVHY) and Flutter Entertainment (OTC: PDYPY), as well as lottery operator and slot machine manufacturer International Game Technology (NYSE: IGT), among others.
Morgan Stanley noted that this year, 34% of European investors are subject to exclusions pertaining to gaming stocks, up from 26% last year. Some 13% of polled hedge funds deal with the same bans, down from 14% in 2021.
As has been widely documented, shares of both Hong Kong- and US-listed Macau operators are struggling due to ongoing COVID-19 lockdowns that are preventing more robust travel to the casino hub.
Morgan Stanley says volume in those stocks is declining in both Hong Kong and New York. But value opportunities among these gaming stocks may become too compelling for money managers to ignore, potentially fostering a rebound in the downtrodden group.
“We think valuation multiples for the group [Macau gaming companies] should still be largely driven by fundamentals: growth potential, earnings quality, and regulations,” according to the bank. “We expect investors to come back to these [Macau gaming] stocks in 2023 as we get clarity on gaming licences and Covid-related travel restrictions.”
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