It’s time to focus on quality global businesses
Rallying markets have raised the valuations of many businesses, possibly to unsustainable levels. To my mind, it’s made one thing clearer than ever: investors need to bulk up on high quality Australian and global businesses, like CSL, Microsoft and Vivendi.
I recently talked about the gravitational force exerted on asset prices and values by interest rates. As interest rates fall so too does their gravitational pull on assets and values. I also reminded investors that while low interest rates are generally supportive for assets, they aren’t immune to setbacks. A rule for investing that should never be forgotten: the higher the price you pay, the lower your return.
With Professor Robert Shiller’s Cyclically Adjusted Price Earnings ratio at a near record high the implied return, for the next decade, from investing in the S&P500 index right now is very low. But a reasonable question might be what should that rate of return (also used as the ‘required return’ or ‘discount rate’ for valuation purposes) be?
Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
Trent Russell
:
Hi Roger,
Could you possibly shed some light on the significant decline in Vivendi’s share price? Im only a newcomer but from what I can see the business seems to be growing revenue etc and I don’t understand why it fell, Im thinking of adding to my position but wondering whether Im missing something?
Thanks
Trent
Roger Montgomery
:
Let me get back to you on that Trent.
Trent Russell
:
Hi Roger,
It seems that they have spun off Universal Music recently. I found an article that mentions that Vivendi shareholders would receive 1:1 share distribution of Universal shares in late September, however I haven’t received any Universal shares in my portfolio?
Roger Montgomery
:
Hi Trent,
I’d speak to your broker. If you are using an online broker, speak to one of their representatives.
David
:
Re-reading this article two months later. Although perspectives have changed (a lot) over the last few weeks, the information contained within in arguably even more relevant today.
Roger Montgomery
:
Thanks David. Appreciate the encouragement.
Tom Newton
:
Yes, I agree that a lower for longer ERP does make a plausible argument for buying equities at current prices. However, those investors buying CSL at $300+ must have huge gonads. And they will need them too, if inflation and interest rates begin rising, as economies eventually begin recovery.
I simply do not believe that interest rates will stay down as long as everybody believes. I say this because the crowd is usually wrong.
Tom
Roger Montgomery
:
fair point Tom.
Max Zan
:
Hi Roger
At the end of the day, you can’t ignore the fact that Equity Valuations are elevated and that increases the risk as it becomes difficult to buy with a decent margin of safety. Having quality businesses protects you to some extent , but buying and holding them not matter the price can have it’s setbacks. It’s a very difficult Investment environment and there appears to be an emphasis on short term performance – taking profits while you can maybe a wise thing to do.
Roger Montgomery
:
YOu might be right Max. It could be that prices are indeed fair value, given low rates, but that doesn’t mean investors are assured of a good return.