The debate rages on: Is this a suckers’ rally or a new bull market? James Montier, the highly respected co-chief strategist of SocGen has weighed in on the subject in his latest Mind Matters investment newsletter. The paragraphs below have been republished from a post by Paul Murphy on the FT Alphaville blog.
The question [whether this is a suckers’ rally or a new bull market] is on quite a few lips right now. Montier says he doesn’t have a clue. So he’s buying insurance – to protect on the downside. From the strategist’s latest missive to clients:
“This strategy paid dividends in Japan which was characterised by explosive rallies (driven by the economic recovery) and the horrifying slumps as the recovery failed. Two methods of insurance stand out. Either I could buy index puts (relatively cheap at the moment) or I could construct individual short positions. In the past I’ve argued that the perfect short candidate is overvalued, with deteriorating fundamentals, poor capital discipline and poor accounting. Running my screen to find such names reveals candidates such as Anheuser-Busch InBev, Ericsson, Cairn Energy, and Staples.”
Montier’s point is that he needs to “off-set ignorance” – and his Eastern experience teaches that a portfolio of shorts offers the best hedge. A value oriented long/short strategy for Japan has generated a return of 12% per annum over the last two decades in Japan, against a market that was contracting at a yearly rate of 4%. A long-only value strategy for Japan generated a 3% return – indicating that the the Japanese market’s under-performance was largely down to the appalling performance of supposed “glamour stocks”, which lost 8.5% per annum over the past 20 years.
So, what to sell … Montier reckons there are four traits to the perfect short: overvaluation, deteriorating fundamentals, poor capital discipline and bad accounting.
Here, in three parts, is his full filtered list (click to enlarge):
Source: Paul Murphy, FT Alphaville, May 6, 2009 (hat tip: GreenLightAdvisor).
