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.
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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.”
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