Why we’re happy to swim against the ‘new paradigm’
You may have noticed there’s a new paradigm being discussed in investment circles – that inflation and interest rates may never rise again. This paradigm has been accompanied by a wave of irrational exuberance, with prices of various assets breaking records by the day. At Montgomery, we are concerned this could all end in tears so, for now, we will swim against the tide.
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.
Andrew Bunting
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Demographics, demographics, demographics. No one is talking about the west’s persistently low replacement birth rate and the boomer pension bulge. The advent of the contraceptive pill & the emancipation & participation of women is a historically genuinely unique phenomena. The effect that’s had on the birth rate, size of families etc is now filtering through the intergenerational statistics. I’m not knocking women (before everybody starts making sexist assumptions about what I’ve just posted). Just saying that a ‘wood with less saplings’ has, by definition, lower growth and so less inflation. Japan… Roger, I think rates won’t stay this low forever. But reversion could be weaker and take longer than you think? Does anyone have hard numbers? Currently going through The Economist pocket world figures to try and see if I’m totally off the mark or not on this…
Scott W
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Andrew you are a LONG way off the mark. Check the stats on the grow rate of Australia’s population and you’ll see that no only are we well ahead on the natural growth rate but the mass immigration program brought in under John Howard has only been boosted since. Australia is growing at the fastest rate in all developed nations globally and has been for years. Why do you think the current population are being saddled with an infrastructure program to combat congestion and the projected insane city growth of Sydney and Melbourne? It’s worst in Australia but almost all developed nations have huge growth pressure via immigration, it seems everyone wants to live the western lifestyle and that is resulting in a shift to more congestion, rampant house price growth rates, and an erosion of quality of life for the current population.
Andre
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Roger,
I think like many I thought the party was going to end 2 years ago but here we are. I think the rise globally of populism will mean that central banks will be charged with doing the heavy lifting for governments worldwide for years to come and that is the only reason that a ‘paradigm shift’ has occurred. Do you remember that elections in the 1990’s were all about public debt and economic management. Now, it doesn’t even rate a mention. Nothing else has changed except that the whole system is now based on ultra low interest rates.
Brett Edgerton
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Well said Roger…
In Grantham’s defence they (GMO) have been discussing the low return future as between purgatory and hell – a crash or sideways moving markets with occasional small corrections – and when he wrote on it last he only slightly leaned the way of the latter… seeing as that was written very early in the current sharp move up (which might prove to be a blowoff stage) I rather suspect he may be thinking the balance of probabilities have shifted…
As someone likely to invest with you when greater value is on offer, I think it is good that you are being very open on your views and how that flows through to capital allocation and prepares coinvestors for likely turbulence ahead… thus you should experience a lower redemption rate than other funds… also your high cash position creates a buffer… it would be disappointing, however, if it were exhausted (plus any inflows) meeting redemptions in a period of market dislocation… this would be my greatest concern with investing through a fund rather than directly – could you discuss please?
Roger Montgomery
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We hope that our constant ranting about buying value will lead to significant inflows during a dislocation. We have a bell we will be ringing rather loudly when we believe the time is right.
Phil Crossan
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If people redeem from the fund after a crash – even if it completely depletes the cash buffer and prevents further fund buying – the fund will then become fully invested and continuing investors should be able to participate fully in the upside.
Brett Edgerton
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As long as the more liquid “gold” wasn’t sold to meet redemptions… but I agree it would need to be a hell of a dislocation for it to be likely to affect these funds for reasons I stated above
Luke Joseph
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Amazon’s PE ratio is also near 200 and that stock is held by the Montgomery Global Fund.
Roger Montgomery
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Amazon is making money and growing at a substantial rate. Netflix is arguably not, yet its share price implies very strong and uninterrupted growth for a very long time.
Dan
:
Thanks Roger for another good article
Kelvin Ng
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Hi Roger, given you have written about this many times and obviously has strong views about it, it would be helpful (if you haven’t done so already – you probably have!) if you could go through the data for the last 100 years and examine at what point during the increase in the 10 year treasury yield (is it the first 50 basis points, 100 basis points or 200 basis points etc.) that equities top out.
I genuinely believe that given the bubble is in government bonds and not in equities, that when that bond bubble bursts the big money will shift to equities (at least initially).
Thanks.
Kelvin
Roger Montgomery
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We had a look at this last week and obeserved it was after the fourth rate rise. The magnitude of the rate rises did also have an impact but generally speaking, in the past (and keep in mind the past is not a reliable guide to the future) four rate rises pass before there’s any need to be concerned about a topping out.
Kelvin Ng
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Thanks a lot Roger. We’ve had 4 increases in the Fed Funds Rate since 2009, starting in Dec 2015. But the US 10 year bond yield has not increased since 2015. Would increases in the 10 year bond yield be more predictive given past data?
Anyway, just a thought. Thanks.
Kelvin
Roger Montgomery
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We’ve looked at both. A steepening of the yield curve tends to support equities initially as it signals economic growth.
Felix
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Referencing Netflix’ PE is disingenuous! Amazons PE was in the clouds for a long time also. How many companies of Netflix’ size can grow revenue at the pace they are and has as much bluesky without a credible competitor? Needs to be value either bottoms up or using a revenue multiple (with caution)
Roger Montgomery
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Mentioning Netflix on its own would be disingenuous but its included in a list of many, many more. And a Revenue multiple sounds like a ‘new paradigm’ metric.
Chris
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On that basis Felix (and with the greatest of respect), we then have the ludicrous notion that “profits will grow to the sky” (without limit) because of extrapolation and therefore, a company has an infinite valuation, because by definition, it becomes impossible to value by way of the fact that in the absence of a competitor, it can (in theory) charge what it likes.
Two ends of the same spectrum, the other being a company that makes no money, which is itself, impossible to value…and there’s quite a few of those out there right now.