James Montier: The Stock Market Is Hideously Expensive by Mark Dittli, Finanz und Wirtschaft
James Montier, the outspoken value investor and member of the asset allocation team of Boston-based GMO, talks about dangerously high valuations and the virtues of holding dry powder.
Four words seem to define the current mood in financial markets: There Is No Alternative. Yes, equity markets might be somewhat expensive, but considering the alternatives – bonds and cash –, they are still the best investment. The correction in October turned out to be a mere hickup in a solid bull market. But James Montier remains skeptical. The value investor and member of the asset allocation team at Boston-based asset manager GMO sees the stock market in a near-bubble and warns investors from being complacent. «To think that central banks will always be there to bail out equity investors is incredibly dangerous», says the outspoken Brit. His source of wisdom in current markets comes from none other than Winnie the Pooh: «Never underestimate the value of doing nothing.»
James, when you screen global equity markets today: Do you still find any value?
James Montier: It’s getting really tough now. It’s getting harder and harder to find really good sources of value these days. There are maybe one or two pockets out there, in Europe and in some emerging markets.
Where exactly?
James Montier: Emerging markets are really bifurcated into stocks you don’t want to own at all, because they are really expensive, and stocks that are outright cheap, but they are also pretty damn scary. In that field, I talk about Russian energy or Chinese banks. I personally don’t like the latter but one can make the argument that they are at least optically cheap. There are a lot of reasons why these stocks are cheap. The good news is that everybody knows why they’re cheap, which means it’s all in the price already. But apart from that, it’s really hard to find anything that is reasonably cheap out there.
So in a simple beauty contest between Russian energy versus Chinese banks you’d go for the former?
James Montier: Yes, I’d go for Russian energy. The problem with the Chinese banks is that they are optically cheap, i.e. they trade on high dividend yields and low PEs. But they are financials, and the credit cycle in China is pretty extended. We’ve been looking at the market-implied levels of non-performing loans in the Chinese banking system, and we came out with 9%. Which is ok, but if you look at a serious, big banking crisis, you get NPL way in excess of 9%. In Thailand in 1997 we saw a NPL level of 45%. I’m not sure there is a big margin of safety in Chinese banks. It certainly is not big enough for my taste.
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