Ben Inker, Head of Asset Allocation at Grantham, Mayo, & van Otterloo (GMO), is interviewed in the latest Bloomberg Masters in Business podcast, providing an interesting take on global equity markets. Inker, whose role models in finance include Jeremy Grantham, Yale’s David Swensen, James Tobin and Economist Robert Shiller, typifies the view that “we do have a speculative bubble that needs to burst” in the U.S. equity market. Inker’s view is that valuations always return to cash flows and that the “evidence of froth is all around us”.
Inker believes over the long term the market should trade at 16x normalised earnings.
Interestingly, Inker views the U.S. market as particularly overvalued, with the rest of the “developed world less so”. He also believes that the current market with the most opportunities is Japan.
“Non-U.S. developed markets are cheaper (United Kingdom, Australia etc), not dirt cheap. The most intriguing market is Japan, where valuations are reasonably low, we believe profitability can improve in a sustainable way. Return on capital in Japan has been lower than that of the rest of the world for the last 40 years, there’s nothing stopping these companies improving that. If you have two stock markets trading at the same PE and one of them has significant scope for earnings growth than the other, it is far cheaper. We are intrigued by Japan.”
It is important to note, Inker's valuation criticism is largely levelled at U.S. "tech giants", who paradoxically are victims of their own success, as they cannot "grow the way they have historically" into the future.
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