GMO’s Montier: “Hideous opportunity set” advises cash and patience

James Montier, member of the asset allocation team at Boston-based GMO, has a hard time finding attractively valued assets these days. His advice to investors: Cash – and lots of patience.  See:  Equity markets are overvalued by 50 to 70%.

“When we look at the world today, what we see is a hideous opportunity set. And 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. So today, nothing is cheap anymore in absolute terms. There are pockets of relative attractiveness, but nothing is cheap or even at fair value. Everything is expensive…

The S&P-500 just keeps drifting upwards. But I think emerging markets are the canary in the coalmine, the first signal. They had been the beneficiaries of these incredible capital inflows. So the fact that they are the first ones to suffer makes sense. It’s not a huge surprise that stock markets in the U.S. have not reacted, because the bond market has not reacted. The bond market seems to think the tapering will turn out fine. Maybe they’re right. But there is no margin of safety in asset pricing these days. That’s no comfortable position to begin a tightening cycle.

Valuations suggest that most people are fully invested today. I don’t see much evidence of people being overly cautious, but a lot more evidence of people getting exuberant. But bear in mind: Owning a large chunk of cash today hurts your performance. Following a value-based strategy requires you to be patient. We know that patience is a rare treat in human beings, and it is extraordinarily rare among investors. Patience hurts. But it is less foolish to do the right thing for the long term, than try to second guess what will happen in the short term.

Several valuation measures suggest that the S&P is overvalued by 50 to 70%. Every piece of valuation I do says this market is too expensive”

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