Blog

Forever with blue genes - Investors might do well to worry a bit more about market valuations

04/04/2014

Jamie Lowry

Jamie Lowry

Fund Manager, Equity Value

Do you have the worry gene? Seth Klarman says he does and, since the billionaire founder of the Boston-based Baupost Group is also one of the professional investors we take most seriously here on The Value Perspective, we thought we would take a closer look at what he means by this. might more investors benefit were they to have the same condition?

Writing in Value investor insight, Klarman suggests that what investors now see in the market says more about them than anything else. “If you were born bullish,” he continues, “if you’ve never met a market you didn’t like, if you have a consistently short memory, then stocks probably look attractive, even compelling.”

Klarman notes the recovering US housing market, the move towards energy independence and other factors but clearly he is not convinced. “If you have the worry gene,” he goes on, “if you’re more focused on downside than upside, if you’re more interested in return of capital than return on capital and if you have any sense of market history, then there’s more than enough to be concerned about.”

For him, reasons to be fearful would include near-zero short-term interest rates and moves by the US Federal Reserve to taper quantitative easing. “Fiscal stimulus, in the form of sizable deficits, has propped up the consumer, thereby inflating corporate revenues and earnings,” he observes. “But what is the right multiple to pay on juiced corporate earnings?”

Now, if you believe corporate earnings are inflated, it stands to reason you will pay a lower multiple on them because they are more at risk. Yet, as Klarman points out, the US market’s cyclically-adjusted shiller price/earnings valuation stands above 25x, which is a level surpassed on just three other occasions – ahead of the 1929, 2000 and 2007 market crashes. So, is that worry gene kicking in yet?

Author

Jamie Lowry

Jamie Lowry

Fund Manager, Equity Value

I joined Schroders in 2004 as an equity analyst in the European Equity Team initially specializing in the Industrial sectors before moving on to Consumer-based companies and finally Insurance. In 2007, I became a co-manager on a fund investing in undervalued European companies and took on sole responsibility for the fund in May 2010. Prior to joining Schroders, I worked at Hedley & Co Stockbrokers and Deutsche Asset Management as a trainee analyst.

Important Information:

The views and opinions displayed are those of Ian Kelly, Nick Kirrage, Andrew Lyddon, Kevin Murphy, Andrew Williams, Andrew Evans and Simon Adler, members of the Schroder Global Value Equity Team (the Value Perspective Team), and other independent commentators where stated. They do not necessarily represent views expressed or reflected in other Schroders' communications, strategies or funds. The Team has expressed its own views and opinions on this website and these may change.

This article is intended to be for information purposes only and it is not intended as promotional material in any respect. Reliance should not be placed on the views and information on the website when taking individual investment and/or strategic decisions. Nothing in this article should be construed as advice. The sectors/securities shown above are for illustrative purposes only and are not to be considered a recommendation to buy/sell.

Past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested.