The following is a Q&A session with James Montier from fuw.ch. In this Q&A session James Montier answers how the current market is boding for a value investor, what cheap assets has he found along with how the Japanese market is showing up on his value screen radar. H/T Value Investing World
Q&A session with James Montier
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Do your clients still believe in the much-cited low return environment? The further markets move up, the more you might have a credibility issue.
James Montier: No doubt. We haven’t yet reached the kind of loathing that was displayed towards us in 1999 where we were just told we were complete idiots and several clients banned us from their buildings. I think there is a broader acceptance of the power of valuation, but the longer the rally goes on, the shorter people’s memory gets. Galbraith used to talk about the extreme brevity of financial memory and I fear that’s kind of what we’re experiencing now. People are looking at last year and say look, it can go up 30%, why on earth are you saying future returns are going to be dismal.
So what do you buy today?
Iben: We’re always looking for the thing the market hates. Two of the most disliked things I have ever seen in my life are miners of gold and Russian equities. So contrary to 2007 when everything was expensive, gold and Russian energy stocks look very cheap. Sure, Russia might be less a part of the European economy, but it might be a bigger part of the Asian economy, so when the market wants to sell us a barrel of oil equivalent for 1 $ by owning Gazprom (OGZD 8.85 1.03%) at 2,5 times earnings, I’m going to do it. Then there is a big dislocation between the amount of currency printed and gold. But you don’t even have to like gold at all to buy gold miners at current valuations. They are pricing in a gold price of 1000 $ or less. So you get a free option on a rising gold price which is the icing on the cake. In general, we prefer companies which have long lived reserves while the market likes reserves that can be turned into cash quickly. We like the optionality of something that’s going to be hard to find and replaced. We’re more owners of assets in this market.
Montier: I agree that there are opportunities in Russia such as Gazprom, Lukoil (LKOD 61.91 0.26%) and Rosneft (ROSN 7.289 -0.42%), which are all incredibly cheap. The reason for being cheap is because they are in Russia. That’s fine because they can lose half of their money or have it stolen and are still on a PE of 4. So what? The downside is reasonably muted in those kinds of stocks.
But Russia has been cheap for a long time.
Iben: We buy when the discount to intrinsic value is large enough. Value eventually plays out.
Apart from Russian energy stocks and scarcity assets: What other cheap assets do you find out there?
James Montier: The other area where we have found some value is within Europe. We like some of the European value stocks. Over the last few years, each time the Eurozone crisis has erupted, we have been presented opportunities to own some pretty decently priced badly run companies – which is fine, I even buy crap if it’s priced appropriately, and it has been. Right now, that’s diminishing, but as Felix said, the Eurozone crisis is fundamentally not over. It’s a little bit like putting a band aid on a missing limb – it might look ok, but it doesn’t work for the long term as you can’t have monetary union without fiscal union. Until you get those two things together, you’re going to have periodic crisis that will be opportunities to look at Europe again.
full interview here fuw.ch