Although GMO’s founder Jeremy Grantham began the year by saying U.S. equities were in a bubble, the firm does see a few pockets of value, says its head of asset allocation Ben Inker. This according to a recent article in CityWire.
Here are takeaways from Inker’s comments:
- As to whether today’s “froth” is as significant as it was in the late 1990s, Inker highlighted that then we were in a “good economic time. There was a pronounced acceleration in productivity growth starting in the mid-1990s, better than anything we had seen since the late 1960s” and added that interest rates were “very different.” Today, by contrast, Inker said there are more “widespread high valuations relative to history” which creates vulnerability for the markets if low interest rates “prove not to be permanent.”
- While some stocks deserve to be pricey, Inker argues that some “are trading at absolutely massive valuations,” citing Apple and Tesla as examples. He adds, “You see up-and-coming technology firms valued as if they’ve already achieved the kind of success that management is hoping for.”
- According to Inker, the profitability of tech could pose a political problem: “It really does appear they are monopolists, oligopolists, and earning profits from that. That is problematic for the economy and society.” He adds, however, that “political action is not a certainty” and would involve “passing new laws, which is not something the government has been proficient in recently.”
- In the Benchmark-Free Allocation fund that Inker manages, he says they are buying high-quality companies in sectors that have gotten “hit hard by Covid, which still look cheap relative to the market.”
- The current level of home prices does not look like a repeat of the U.S. housing bubble of 2008-2009, according to Inker. “The biggest difference,” he says, “and what made us so confident [last time] was the increase in homebuilding activity.” While there has been an uptick in housing activity today, Inker said it’s nothing like what we saw back then and it’s being limited by the rising costs of building materials. “All of that said,” he argues, “if interest rates go up, house prices will almost certainly have to go down.”