Montier Has ‘Never Been More Bullish’ on Stocks

Nov. 25 (Bloomberg) -- Societe Generale SA strategist James Montier said he’s never been so bullish after the financial crisis dragged down prices for stocks, corporate bonds and inflation-protected government debt.

London-based Montier identifies equities and bonds, in aggregate terms, as being priced at exceptionally attractive levels. For instance, the yields on BAA-rated bonds are now the highest since the 1930s; and senior secured debt is available for 50c-70c on the dollar. In the case of equities, the US is trading on a Graham and Dodd price-earnings ratio of 15 times, against an average of 18 times since 1871; the UK is trading on 12 times such a measure against an average of 16 times since 1927.

From a bottom-up perspective, Montier argues, opportunities are compelling. In Europe and the UK nearly one in ten stocks passes an augmented Ben Graham screen. In Japan and Asia one in five stocks passes the screen. Even 15 stocks within the S&P500 are shown up as deep-value opportunities.

Corporate bonds are pricing in the highest default rate since the Great Depression and some senior secured debt is trading for as little as 50 percent what investors would recover in a bankruptcy, Montier wrote. The drop in bonds may amount to “the investment opportunity of a lifetime,” he said.

Equities tumbled this year, sending benchmark indexes in the U.S., Europe and Asia down more than 40 percent, as financial-company losses stemming from the U.S. housing-market collapse approached $1 trillion. Merrill Lynch & Co.’s U.S. Corporate Master Total Return Index of investment-grade corporate bonds declined 13 percent this year.

The Federal Reserve has reduced its benchmark interest rate to 1 percent from 5.25 percent in September 2007 and pledged to lend more than $7 trillion to revive the economy. Investors can get cheap insurance against the risk Fed lending spurs inflation by purchasing government bonds that pay interest on a principal amount that rises with the consumer price index, Montier wrote.

“Such instruments have seen their yields rise dramatically of late,” he said. “Mr. Market is offering you the opportunity to protect yourself from the ravages of inflation in an exceptionally cheap way.” Bond yields move inversely to prices.

Montier was a member of the top-ranked investment strategy team in Thomson Extel’s surveys the past three years.

“With all of these opportunities available I have never been more bullish!” he wrote. “Will I be early? Almost certainly yes, but if I can find assets with attractive returns and I have a long time horizon I would be mad to turn them down.”

Some people say they want to wait for a clearer view of the future. But when the future is again clear, the present bargains will have vanished.

Can prices go lower from here? Almost certainly, yes. But as Jeremy Grantham noted recently, ‘If stocks are attractive and you don't buy and they run away, you don't just look like an idiot, you are an idiot'. Further, it is worth reminding ourselves that whilst valuations may not matter for short-run returns (this is normally just a momentum effect), they are a primary determinant of long-run returns. On this score, markets are cheap regardless of near-term direction.