From Advisor Perspectives:
GMO’s Ben Inker says he wouldn’t touch U.S. small-capitalization stocks “with a 10-foot pole” – and says he sees no asset class that is attractively priced. That isn’t the way Blackrock, the world’s largest asset manager, sees things. Blackrock’s Dennis Stattman likes Japanese equities and gold and isn’t afraid of rising rates.
Inker is the head of asset allocation at the Boston-based GMO and Stattman is head of the global allocation team within the multi-asset strategies group at New York-based Blackrock. Inker manages the GMO Benchmark-Free Allocation III Fund and the Wells Fargo Absolute Return Fund. Stattman manages the Blackrock Global Allocation Fund.
At the recent Morningstar investment conference in Chicago, the two discussed their global market views in a panel session hosted by Morningstar’s Kevin McDevitt.
Let’s look at what each had to say about key asset classes in the global markets.
On European value stocks
Although Inker sees opportunity in European value stocks, he says that “you've really got to hold your nose to find stuff to buy.” He is finding pockets of opportunity in the more cyclical, leveraged and European-focused companies – but those companies are cheap for a reason and “they all have hair on them.” He is betting that the market is under pricing unfavorable European utility, telecommunications, automobile, and energy companies. Inker said GMO has very few investments in European banks because of little visibility as to what is on their balance sheets. He is not confident that they are a bad investment but is unwilling to invest in companies he does not know much about.
Stattman sees occasional opportunity in international oil companies domiciled in Europe and in European cyclicals that offer a combination of depressed margins and cheap valuations. His optimism is tempered by underlying problems of European governments that “promise too much, tax too little and don’t have a match between their fiscal policies and monetary policy controlled by the European Central Bank (ECB).” The ECB’s guarantee of liquidity has removed the market’s fear of a European banking system failure, according to Stattman, and removal of this tail risk has led to upward valuations in European stock markets and more favorable value.
Stattman says trading equity volatility has become too crowded with the VIX, a measure of volatility, at historic lows. But Inker says that in 4% of their portfolio, GMO is selling puts in Europe and Japan where implied volatilities are higher. He sees this as a way to get paid for taking equity risk.
On U.S. small caps
With regard to U.S. small caps, Inker says he cannot envision a scenario where they can increase their profitability on a sustainable basis to justify their valuations. Profit margins have been better in the U.S. markets than in the global markets, and small caps have benefitted from their more domestic orientation and better profit margins.
Stattman also says profit margins on U.S. small caps will not continue to increase and sees those margins reverting to the mean. He is not sure when this would happen. He feels that “the labor share is an important component, and you have to be a bull on labor to be a bear on profits.”HT: ValueWalk
On emerging markets and Japan
Inker says he is most scared of emerging-market countries that are in a dangerous area of the credit cycle and potentially on the edge of a financial crisis (which, he added, they deserve). In China, Turkey and Brazil, there has been rapid credit growth and investment in bad ideas. He believes those debts will go bad and negatively affect these economies....MUCH MORE
