We remain in the throes of a third value bear market that doesn’t look set to ease any time soon, according to Investec’s Alastair Mundy (pictured). 
The manager, who runs the £716m Temple Bar Investment Trust, says there are too many headwinds in the market and too few attractively-valued stocks to find much to be positive about right now.
In fact, he believes that the current level of government debt along with deflation levels suggests we are in the throes of a global financial crisis as opposed to economic recovery.
“In the seven years preceding the global financial crisis we put on $55trn of debt and in the seven years post-2008 the world has managed to put on $57trn of debt, so it’s actually put on more debt than it has over the previous seven years. I think that’s quite bad, yet I’m constantly being told we’re going through a healing process. If this is the healing process, I hate to think what the deterioration process might look like,” he said.
“In terms of deflation, we are now in exactly the same place we were eight years ago. We’ve had interest rates going down effectively to zero, we’ve had government debt going through the roof, we’ve had loads of QE, we’ve had everything the [governments and banks] could possibly do to make this world a better, safer place for everybody and to me financially, [but] I think if you’re being really nice it looks no better. If you’re looking at it through my eyes it looks a little bit worse, significantly worse in fact.”
The reason Mundy is particularly worried going forwards is that he believes all of the potential measures that could be used to boost the global economy have been exhausted and that if there were to be a further deterioration, there is not much left to help fix it.
As such, he says that negative interest rates and more extreme levels of QE shouldn’t be ruled out in the near future.
“If you think I get those weird theories off of the internet at two in the morning in some dark nasty cellar, I don’t. I get them from reading what central bankers are talking about. They seem to be warming us up to this sort of stuff,” he continued.
“The interesting thing is we’ve seen all these sorts of things before. We studied it in O-level history and it didn’t end very well.”
While the manager believes that these macroeconomic issues are important to monitor, he primarily adopts a bottom-up stock-picking process in order to fulfil Temple Bar’s contrarian, value-based investment style.
However, he also admits it has been challenging from this aspect as a result of disappointing P/E and P/B ratios across the board, as well as the fact he won’t hold high-yielding blue-chip or ‘bond proxy’ stocks.
“Although we’ve had share price falls, we’ve also had earnings downgrades coming along just as quickly, so many stocks now looks cheaper in current earnings terms than they did five or six years ago,” Mundy said.
“Yes dividend yields look more attractive, but unfortunately without earnings to support them, you can’t really trust them because so many companies are paying their dividend out of debt.”
The manager adds that, on a 15-year basis, there have been many more earnings downgrades in the FTSE 250 index than there have been upgrades and that this pattern doesn’t look set to ease any time soon.
“Chief executives are always too bullish. Their bullishness has to be reined in unless even they thought it was the end of the world in 2009 and there was a bit of space for upgrades,” he said.
“We don’t bother meeting chief executives because they’re not unbiased. They’re inspirational and optimistic in a glass-nine-tenths-full kind of way. They’re not that objective.”
Mundy says we have entered a value drought, which he admits has taken its toll on his trust’s performance.
Over the last one, three and five years, Temple Bar has been in the bottom quartile for its total returns and has made a loss of more than 10 per cent over the last six months.
Performance of trust vs sector and benchmark over 3yrs
Source: FE Analytics
“The performance has been poor over the last couple of years and I would like to introduce you to ‘value hell’. Value hell comes along every so often for a value investor. I always think it has to because value investing is simply too easy without value hell appearing every now and again,” he said.
“I can’t get away from it, it’s certainly disappointed us and our board and our shareholders, but I’m afraid it happens when you’re a dyed-in-the-wool value investor.”
“There’s no doubt we made some added mistakes on top of that, but I still think we’d be roughly where we are today even if we hadn’t scored particular own goals.”
The manager says we are in the midst of the third value bear market in 20 years, and it is uncertain how long it will last for. As a result, he says that over the next five years it will be a case of what he doesn’t own being as important as the stocks he buys for his relative performance.
“I don’t think I’m saying anything particularly weird when I discuss my bear argument, but then I look at other people’s portfolios and they look nothing like mine. I think in general, everyone’s got their fingers crossed hoping that everything is going to be okay,” he said.
“Our industry always wants to be bullish, we always want to tell our clients that we’re either optimistically optimistic or cautiously optimistic, so we have got a bias. I just don’t see a huge amount to be optimistic about at the moment.”
Temple Bar Investment Trust is trading on a 5.9 per cent discount, is 3 per cent geared and yields 3.7 per cent. It has an ongoing charge of 0.48 per cent.
