Value investor James Montier of asset management firm GMO can’t find any attractive investments these days. While there a few relatively cheap assets, nothing is cheap in absolute terms, and he is shifting his portfolio to cash and other cash-like assets in preparation for high interest rates and weak equity markets.

James Montier

“When we look at the world today, what we see is a hideous opportunity set,” Montier told Mark Dittli and Gregor Mast in an interview with Finanz und Wirtshaft. “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.”

Value investors forced to bet on the outcome of QE

Even though the Federal Reserve is now tapering its QE program, the market is unmoved by the problems that it may soon face, and the possibility that the Fed will respond to falling markets by jacking liquidity up again puts value investors in an awkward situation. Building a portfolio almost requires placing a bet on whether QE is going to end on schedule or continue as the economy falls into a QE trap, and anyone looking for robust investments won’t have much to choose from.

Emerging markets are suffering now because they were the first to benefit from inflows of liquidity, but as liquidity dries up he thinks the pain will spread and EM will prove to have been the “canary in the coal mine.”

“We have about 50% in equities, and 50% in dry powder-like assets. That means some cash, some TIPS, and some long/short equity spread trades,” says Montier. “We are reducing the equity part over the course of the year, to build up dry powder.”

S&P overpriced by 50% – 70%: Montier

Montier thinks the S&P 500 is overpriced, by 50% to 70% according to some of the measures he’s looking at, but he doesn’t see any of the mania you would normally associate with a bubble. Instead, he sees a “policy-driven, cynical kind of bubble” that assumes the Federal government will continue driving markets with cash as necessary to support stock prices.

Looking for relative value, Montier is happy to own high quality US stocks, but he is reducing his position. There is still some value in Eurozone stocks, but not nearly as much as a year ago, and Montier warns that there is a real threat of deflation. Montier also sees some value in emerging markets, but he prefers not to invest in financials or resources, which comprise a lot of EM stocks.