James Montier, member of the asset allocation team at Boston-based GMO, has a hard time finding attractively valued assets these days. His advice to investors: Cash – and lots of patience.
James Montier is a full-blooded value investor. Pickings are slim these days, though, says the member of the asset allocation team at the Boston-based asset manager GMO. He sees a «hideous opportunity set» for investors, with the S&P-500 being overvalued by 50 to 70 percent.
James, are you able to find anything in today’s financial markets that still has an attractive valuation?
Nothing at all. When we look at the world today, what we see is a hideous opportunity set. And that’s a reflection of the central bank policies around the world. They drive the returns on all assets down to zero, pushing everybody out on the risk curve. So today, nothing is cheap anymore in absolute terms. There are pockets of relative attractiveness, but nothing is cheap or even at fair value. Everything is expensive. As an investor, you have to stick with the best of a bad bunch.
Where are these pockets of relative value?
There are two and a half of them. The half pocket is high quality stocks, companies that have high and stable profitability. But granted: They are nowhere near as compelling as they were even a year ago, so we are slowly selling our high quality positions. We are by the way also reducing our overall equity weight gradually as this year goes on. We have already taken about five points out, and we are at 50 percent now. By the end of the year we’ll probably be at around 39 percent.
And what are the other pockets of value?
European value is still somewhat okay – although there we have increasing concerns about the prospect of deflation in the Eurozone. The breakup risk of the Eurozone has been diminished, the thing seems to be holding together. But that comes with the cost of outright deflation in peripheral countries. That’s a big issue for European equities, not only because deflation increases the discount rate in real terms, but it also increases their debt in real terms. They will owe more in real terms the longer this deflation goes on.
What sectors fall under European value?
A mixture of asset rich sectors: Utilities, oil & gas, some telecom, some industrials. Names we like in that field are Total (FP 47.565 0.69%), BP, Royal Dutch, Telefonica and the like. The problem with all those sectors is that they tend to be debt heavy, which is why the prospect of deflation is such a big issue.
But the European market in general is not cheap anymore?
No. The time to be buying broad European equities was two years ago.
How do you make sure you don’t fall into a value trap with sectors like utilities and telecom?
You can deal with it by demanding a very large margin of safety. I’d argue you don’t get that right now. You could try fundamental analysis, have guys who think they know something about these stocks, and the third is good diversification. You don’t want too much in any one individual name. That’s why we own 150 stocks in our European value portfolio....MORE