{"id":3705,"date":"2014-02-14T07:13:55","date_gmt":"2014-02-14T05:13:55","guid":{"rendered":"https:\/\/clusterfamilyoffice.com\/blog\/?p=3705"},"modified":"2014-02-14T07:13:55","modified_gmt":"2014-02-14T05:13:55","slug":"cuidado-con-los-mercados-desarrollados","status":"publish","type":"post","link":"https:\/\/clusterfamilyoffice.com\/en\/cuidado-con-los-mercados-desarrollados\/","title":{"rendered":"Beware of Developed Markets"},"content":{"rendered":"

\"\"The party continues. Following the rallies on the American and European stock markets \u2013 particularly the Spanish one \u2013 it seems that most investors are set to stumble over the same old stumbling block once again. When? It\u2019s impossible to say for certain, but what is certain is that the stumbling block is there and investors, giddy from such a rally, are running about like headless chickens. And what is this stumbling block that so many are set to trip over? Well, logically, it\u2019s the valuations in developed stock markets, which are by no means cheap any longer \u2013 not to mention that they\u2019re already starting to look expensive. Especially when we bear in mind that corporate profits are at record highs and interest rates at record lows, which inevitably brings us closer to the end of this cycle and the start of the next.<\/p>\n

We must also distinguish between the developed European and American stock markets: the European market is facing persistent deflation, which may well continue if the ECB is forced to take extraordinary measures similar to those taken by the Fed in recent quarters. But with the spectre of solvency crises and recession looming over the periphery, this will not bode well for its stock markets. It is true that the German stock market is trading at more reasonable prices than the Spanish one, but despite its efforts to shield itself, we must not forget that we are still all in the same boat \u2013 Central Europeans, Northern Europeans and the southern periphery. And that could be a source of contagion for turmoil on European stock markets, although, logically, those in the south will bear the brunt of it, as they are at the epicentre of the financial problems and are therefore trading at levels equivalent to almost 20 years\u2019 worth of profits.<\/p>\n

In the case of the US, its market is facing a relatively rapid wind-down of QE, as its economy is recovering more strongly than most had anticipated. But this will also bring with it the prospect of inflation, which is no longer so far off. And that potential rise in interest rates, combined with share prices already on a par with the Spanish stock market in terms of P\/E ratios, creates the perfect storm for a correction in share prices over the coming six months.<\/p>\n

To illustrate the point we\u2019re making, here are a couple of prime examples: Gifford Combs<\/a> y \u00a0Francisco G. Param\u00e9s<\/a>. One with an American (and global) perspective, and the other with a more Spanish (and European) outlook. Both offer judicious and moderate views, but explain why it is becoming increasingly difficult for them to find good investments at current prices. Both clearly warn of the dangers of investing at these valuations, even though no one can know just how far market inefficiency might go.\u00a0It goes without saying that both, as star fund managers that they are, manage to buy companies for their portfolios at significantly lower prices and with greater value than the average company valuations reflected in each country\u2019s benchmark indices. But believe me, if even they are struggling to find value at the moment, the margin for error for the vast majority of investors is zero. A telling statistic: one keeps almost two-thirds of his portfolio in cash, whilst the other \u2013 although historically fully invested \u2013 also holds cash at record highs.<\/p>\n

Here is a summary of the quarterly letter<\/a> from Bestinver (Param\u00e9s), and below that another summary of the annual newsletter from Dalton Investments<\/a> (Combs). We hope these will inspire you to resist the temptations of the headless chickens scurrying about you:<\/p>\n

Param\u00e9s (Bestinver):<\/p>\n

The least positive news of 2013 is that the funds\u2019 potential is at a historically low level, although it remains reasonably positive at approximately 50%. Our main task as fund managers is to try to create value in the funds, and we focus all our energy on this. Paradoxically or not, the better the performance of the funds and the stock markets in general, the more difficult our task becomes. The good news is that the quality of the portfolio remains at record highs, as reflected in the average return on capital employed, the range of competitive advantages we enjoy in our investments, the defensive nature of many of them, the low or non-existent levels of debt, and the high proportion of family-run companies. We also benefit from the protection and optional value provided by the funds\u2019 liquidity\u2014which is currently relatively high\u2014in the event of a potential market downturn. After two years of exceptional returns, a dose of caution is certainly warranted, in keeping with the maxim that the less you see around you in the management of others\u2019 affairs, the more you should exercise in the management of your own.<\/em><\/div>\n
\u00a0<\/em><\/div>\n
At Bestinver, we tend to be guided by the value investing adage regarding macroeconomic forecasts, which states that they usually contain a great deal of information about the person making them and none about the future. Although we try to understand economic cycles, our macro view only has a significant impact on our investment process when we believe we are facing major imbalances or trends. Recently, there has been much debate about austerity versus growth and about the role of monetary and fiscal policies in relation to economic growth. We feel that the debate is rather off track. Without wishing to offer anything entirely new, allow us to recall how the Austrian School of Economics understands how economic growth comes about. Economic growth stems from efficient production, not from consumption. One cannot consume what has not been produced. Growth in efficient production requires greater specialisation of labour, the accumulation of capital, and markets that operate with freedom of enterprise and the free entry and exit of factors of production. In turn, all of this is based on the protection of fundamental institutions such as private property, respect for the law in its substantive sense, and a sound monetary system. Economic growth is not achieved by incentivising consumption, nor by encouraging debt, nor by lowering interest rates or monetising public debt, nor by diverting resources from the market to the public sector, etc.\u00a0<\/em><\/div>\n
\u00a0<\/em><\/div>\n
<\/em>At Bestinver, we always take the same line, and we take comfort in the fact that, in the long term, the stock markets tend to reflect the economic growth driven by companies.\u00a0<\/em>Historically, they have only proved to be a poor long-term investment when investments have been made at excessive valuations. Avoiding excessive valuations is precisely at the heart of the value strategy and, therefore, it is what we always strive to do at Bestinver, in all circumstances.\u00a0<\/em><\/div>\n
<\/div>\n
Combs (Dalton-GAM):<\/strong><\/div>\n
\n

Results for 2013 were satisfactory from a long-term perspective but decidedly mediocre when compared with stock market indices<\/b>, which enjoyed one of its best years in recent memory. It is worth looking back to see where we went wrong and where we succeeded.<\/em>\u00a0<\/em><\/p>\n

At least from a short-term perspective, we were far too cautious in 2013.<\/b>\u00a0We should have been fully invested right from the start, and in the riskiest assets at that. But we prioritise capital preservation and risk control. Nevertheless, with hindsight, we were too quick to take profits and reduce our exposures, and this cost us in terms of performance. Some specific examples provide insight.<\/em><\/p>\n

We began the year, as we did in 2012, with a large overweight position in financial company securities, comprising both equity and quasi-debt (more on this in a moment). As the year progressed, we gradually reduced our exposure as share prices rose, in line with our usual pattern. Our holding in Morgan Stanley & Co is a good example of this behaviour.<\/em><\/p>\n

In the summer of 2011<\/b>, we established our position in Morgan Stanley, which we began buying at a price of around sixteen dollars per share and continued to buy all the way down to thirteen dollars per share. At the time, we felt that a very conservative valuation for the company was no less than about twenty-five dollars per share, and possibly a little more, giving us a sufficient margin of safety. By March of last year, our estimate of the company\u2019s value had risen slightly to around twenty-eight dollars per share, and the share price had almost caught up, reaching twenty-seven dollars. We reduced our holding substantially at that point. We had started the year with a holding of over five per cent of the portfolio and, although we sold steadily, we could not sell as quickly as the share price was rising, and by the end of July our holding had only fallen to three per cent!<\/em><\/p>\n

Based on new information from the company\u2019s financials, we raised our fair value estimate once again in the summer to around thirty-two dollars per share. The share price has continued to rise and now stands at over thirty-one dollars, very close to our fair value. Interestingly, though not surprisingly, Wall Street analysts \u2013 who were highly critical of Morgan Stanley two years ago \u2013 are now falling over themselves to recommend the company. Some analysts believe the fair value to be over thirty-eight dollars per share, which strikes us as optimistic. Even if that were true, the shares would not represent compelling value today, and our holding has now fallen to just over one per cent of the portfolio.<\/em><\/p>\n

Morgan Stanley is by no means unique, but it is a very typical example of the cycle of greed and fear in financial markets<\/b>.\u00a0In the summer of 2011, people were worried that the company was going bankrupt<\/b>. Yet any reasonable analysis showed that this was hardly a risk.\u00a0Today, analysts want to believe that the company\u2019s profitability will magically return to \u201cpre-Lehman\u201d levels<\/b>. This, too, seems highly unlikely: regulatory capital requirements are much higher than in the past, profitable trading activities are restricted or, in some cases, prohibited, and market enthusiasm is generally less pronounced. Morgan Stanley will continue to be a highly important global financial institution. It simply will not be as profitable as it once was.<\/em><\/p>\n

As with Morgan Stanley, so too with much of the rest of the portfolio. We sold as share prices rose. That is what we are supposed to do. Our aim is to build and hold a portfolio of assets trading at low valuations, not at fair valuations. Sometimes, as in the summer of 2011 or the autumn of 2008, there are countless opportunities to deploy capital in such situations. At other times, such as now, there are relatively few such opportunities.<\/em><\/p>\n

So what\u2019s wrong with \u201cfair value\u201d anyway? Nothing, except that markets have a nasty habit of trading at a discount to fair value just when you need to sell assets, and that can be painful.\u00a0In our view, and in the opinion of quite a few other successful investors, share prices in the USA (and across the developed world, for that matter) are currently fairly priced. However, \u201cfairly priced\u201d must be viewed in context: interest rates are at very low levels\u2014currently around three per cent on the US 10-year Treasury bond. Furthermore, corporate profit margins are at near-record highs. Both of these factors serve to increase \u201cfair value\u201d.<\/b><\/em><\/p>\n

We are firm believers in the concept of \u201cregression to the mean\u201d in capitalist economies.<\/b>\u00a0We do not believe that interest rates will remain low forever, nor do we think that profit margins can remain high indefinitely. Capitalism is dynamic enough to erode margins, and increased demand for capital will put upward pressure on interest rates. If one builds a portfolio today at \u201cfair value\u201d, assuming that these conditions will last indefinitely, one is likely to be in for a very nasty shock. When margins and profitability fall, fair value will drop. And when interest rates rise, fair value will fall. A combination of the two could make for a particularly nasty investment mix.<\/em><\/p>\n

So, from our point of view, it is prudent to wait for better opportunities to deploy capital, rather than try to \u201cforce\u201d our way into a fully-invested portfolio at prices that we consider imprudent.<\/em><\/p>\n

Meanwhile, it has been a busy year for us. We assess opportunities on a daily basis and were able both to take new positions and to close out some existing ones during the year. However, in most cases we were unable to allocate substantial amounts of capital to these opportunities because the markets did not cooperate and keep prices low.<\/em><\/p>\n<\/div>","protected":false},"excerpt":{"rendered":"

La fiesta sigue. Despu\u00e9s de los rallys de bolsas americanas y europeas -especialmente la espa\u00f1ola- parece que la mayor\u00eda de inversores va a volver a tropezar con la piedra de siempre. Cu\u00e1ndo? No se puede precisar, pero lo que es seguro es que la piedra est\u00e1 ah\u00ed y los inversores, ebrios de tanta subida, corren […]<\/p>\n","protected":false},"author":6,"featured_media":0,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[54,42,40,52,37,48,55],"tags":[],"class_list":["post-3705","post","type-post","status-publish","format-standard","hentry","category-asesoramiento-patrimonial-deportistas-artistas","category-estrategia","category-gestion-financiera","category-asesoramiento-patrimonial-multi-family-office","category-reflexion","category-asesoramiento-patrimonial-multi-family-office-crear-mi-propio-family-offices","category-necesito-un-family-office"],"_links":{"self":[{"href":"https:\/\/clusterfamilyoffice.com\/en\/wp-json\/wp\/v2\/posts\/3705","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/clusterfamilyoffice.com\/en\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/clusterfamilyoffice.com\/en\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/clusterfamilyoffice.com\/en\/wp-json\/wp\/v2\/users\/6"}],"replies":[{"embeddable":true,"href":"https:\/\/clusterfamilyoffice.com\/en\/wp-json\/wp\/v2\/comments?post=3705"}],"version-history":[{"count":0,"href":"https:\/\/clusterfamilyoffice.com\/en\/wp-json\/wp\/v2\/posts\/3705\/revisions"}],"wp:attachment":[{"href":"https:\/\/clusterfamilyoffice.com\/en\/wp-json\/wp\/v2\/media?parent=3705"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/clusterfamilyoffice.com\/en\/wp-json\/wp\/v2\/categories?post=3705"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/clusterfamilyoffice.com\/en\/wp-json\/wp\/v2\/tags?post=3705"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}