James Montier: valuations are way too high

The market is completely discounting the risk to the economy and operating as if there is nothing to worry about, pricing in a V-shaped recovery, says James Montier, investment strategist at GMO.

James Montier, investment strategist, GMO

Investors normally overreact at extremes, James Montier, the value-investing guru who serves on GMO’s asset allocation team, tells Barron’s: they value stocks at “peak multiples on peak earnings and trough multiples on trough earnings”. But this time, it’s different. “Instead of following the collapse in earnings, the market is completely discounting [the risk] and operating as if there is nothing to worry about … and has priced in a V-shaped recovery.” 

Yet even if earnings were to rebound, valuations still seem expensive. The economic expansion that ended with the Covid-19 crisis “was the longest but also the weakest economic recovery on record” and stockmarket gains have run ahead of earnings growth. That’s especially true in America, where rising valuations and share buybacks have been responsible for virtually all the superior performance of US stocks over the rest of the world, as Montier noted in a research report before the pandemic arrived in March.

So most assets are making no allowance for the potential risks. Small caps look especially vulnerable to a severe recession, but even larger stocks that have done well so far – ie, big tech – “are probably only relative winners … Google and Facebook … aren’t going to see an increase in advertising revenue, so it’s not clear they win in an absolute sense”. Only emerging markets look cheap enough. “Everybody and their mother hates emerging markets,” which gives you a “much greater margin of safety.”

Recommended

Britain’s ten most-hated shares – w/e 1 July
Stocks and shares

Britain’s ten most-hated shares – w/e 1 July

Rupert Hargreaves looks at Britain's ten most-hated shares, and what short-sellers are looking at now.
4 Jul 2022
Britain’s most-bought shares w/e 1 July
Stocks and shares

Britain’s most-bought shares w/e 1 July

A look at Britain’s most-bought shares in the week ending 1 July, providing an insight into how investors are thinking and where opportunities may lie…
4 Jul 2022
M&G offers a solid 10.1% yield – but future growth is uncertain
Share tips

M&G offers a solid 10.1% yield – but future growth is uncertain

Financial services group M&G has one of the highest dividend yields in the FTSE 100. But it’s a complicated company, and a tough one to analyse, says …
4 Jul 2022
We’re doing well on pensions – but we still need to do better
Pensions

We’re doing well on pensions – but we still need to do better

Pensions auto-enrolment has vastly increased the number of people in the UK with retirement savings. But we’re still not engaged enough, says Merryn S…
4 Jul 2022

Most Popular

Ray Dalio’s shrewd $10bn bet on the collapse of European stocks
European stockmarkets

Ray Dalio’s shrewd $10bn bet on the collapse of European stocks

Ray Dalio’s Bridgewater hedge fund is putting its money on a collapse in European stocks. It’s likely to pay off, says Matthew Lynn.
3 Jul 2022
UK house prices are definitely cooling off – but are they heading for a fall?
House prices

UK house prices are definitely cooling off – but are they heading for a fall?

UK house prices hit a fresh high in June, but as interest rates start to rise, the market is cooling John Stepek assesses just how much of an effect h…
30 Jun 2022
How to invest in copper, the most important metal in the world
Industrial metals

How to invest in copper, the most important metal in the world

As the world looks to electrify and try to move away from fossil fuels, copper looks set to be the biggest beneficiary. But how can you invest? Rupert…
30 Jun 2022