The rot amongst SocGen’s strategy team continues.
From James Montier’s latest Mind Matters series:
We have long argued that the final stage of the de-bubbling process is revulsion. This phase is characterised by overwhelmingly cheap asset prices. Recent price moves in the UK and European stock markets have taken us to levels that have generally been associated with revulsion (i.e. 10x). Of course, cheap markets can always get cheaper, but for the long-term investor this may provide an excellent entry point. From a bottom-up viewpoint, the general cheapness of the market is confirmed. Of special note is the quality of stocks that are currently passing our deep value screens — names like Microsoft, BP, Novartis and Sony!
It seems that the hallmark of “revulsion” is unambiguously cheap asset prices - and also characterised, Montier says, “by us being embarrassed to admit we work in finance.”
I was in the North of England a few weeks ago and took a cab, the driver asked me what I did for a living, and I had to wrack my brains for an answer that in those parts would be more socially acceptable than a banker - not easy since up there even paedophiles probably get a better press these days!
On Montier’s preferred valuation measure, a so-called graham and Dodd PE that pitches the share price against a 10-year moving average of reported earnings, the S&P 500 is currently trading at 13.6 times. That compares with an average of 18x since 1871 and a typical “bargain basement” level of 10x.
One caveat: the 30s depression saw this indicator drop to 5 times earnings.
Related links:
Albert Edwards allegedly spots “green shoots” - FT Alphaville
