The question is on quite a few lips right now. The Footsie is up 25 per cent in the space of two months, as has S&P 500 has risen some 34 per cent from its March 9 low.
James Montier at SocGen says he doesn’t have a clue. So he’s buying insurance - to protect on the downside. From the strategist’s latest Mind Matters missive to clients:
This strategy paid dividends in Japan which was characterised by explosive rallies (driven by the economic recovery) and the horrifying slumps as the recovery failed. Two methods of insurance stand out. Either I could buy index puts (relatively cheap at the moment) or I could construct individual short positions. In the past I’ve argued that the perfect short candidate is overvalued, with deteriorating fundamentals, poor capital discipline and poor accounting. Running my screen to find such names reveals candidates such as Anheuser-Busch InBev, Ericsson, Cairn Energy, and Staples.
Montier’s point is that he needs to “off-set ignorance” - and his Eastern experience teaches that a portfolio of shorts offers the best hedge. A value oriented long/short strategy for Japan has generated a return of 12 per cent per annum over the last two decades in Japan, against a market that was contracting at a yearly rate of 4 per cent. A long-only value strategy for Japan generated a 3 per cent return - indicating that the the Japanese market’s under-performance was largely down to the appalling performance of supposed “glamour stocks,” which lost 8.5 per cent per annum over the past 20 years.
So, what to sell…Montier reckons there are four traits to the perfect short: overvaluation, deteriorating fundamentals, poor capital discipline and bad
accounting.
Here, in three parts, is his full filtered list (click to enlarge):
Related links:
China’s fake recovery - FT Alphaville
All to back to normal…? - FT Alphaville
