Gray: Corporate profits built on sand
MAM's Martin Gray says he remains bearish on global growth so is sticking with low-risk assets.
It’s still too early to buy equities, according to FE Alpha Manager Martin Gray
), who says that investors should be wary when managers talk of the strong balance sheets of corporates and their cheap valuations.
Many professionals have argued that with stocks looking cheap on a historical basis and blue-chip companies recording strong profits, now is the time to buy, but Gray, who runs CF Miton Special Situations
and CF Miton Strategic Portfolio
, says equities may still have further to fall.
The manager, who runs CF Miton Special Situations and CF Miton Strategic Portfolio, says the current strong performance of corporates is built on shaky ground, and he is not thinking of moving back into riskier assets.
“Corporates are going to struggle to maintain their profits. Revenues are getting constricted: they are falling or struggling to remain stable. You have to ask how long they will be able to maintain their bottom line.”
“You can squeeze margins – and real wage growth has been broadly negative on and off over the past decade – but how long can that continue?”
“Investors need to be wary. If global growth goes through a slow period over the next few years and potentially goes negative, on that basis profits may not go up.”
“I still think there are too many investment professionals living in the 80s and 90s who think there is only one place to invest and that’s equities,” he said.
Data from FE Analytics shows that Gray made 5.89 per cent in 2008 while his peer group lost 19.8 per cent.
Performance of Martin Gray vs a peer group composite over 5yrs
Source: FE Analytics
He managed this by calling the crisis before it occurred and switching into lower-risk assets, and he says the signs of the imminent crash were there in the irrational behaviour of investors.
“We are now getting a dose of reality. In 2007 there was very little reality in the investment world; it was all about piling into the fastest-growing investments. The attitude was ‘don’t worry, we’ll just gear up some more’.”
“I’ve been invested in low-risk assets over the past five years and I see no reason to change that right now. I can’t see myself switching into higher-risk investments any time soon.”
Rathbone’s chief investment officer Julian Chillingworth
told FE Trustnet last week that equities are currently the only place to be for income
investors, with yields on fixed-income investments tightening.
Gray agrees there is the potential for strong yields in the asset class, but argues that the risk to capital outweighs this.
“So as long as you are prepared to take the capital risk, that’s ok. It’s then a question of what level you buy your yield at.”
“I would be looking at equities 10 to 20 per cent lower than they are right now before I even think about buying, maybe even more.”
“There have been opportunities to buy yielding investments over the past few years but now is not one of them.”
“If we start to see the S&P 500 at the 1200 mark I might think about it, but now it’s at 1370-ish and I’m not interested at all.”
“I think things are going to get even cheaper in the future.”
“We are investing in low-risk assets and trying to eke out returns from the bond markets. We have some cash deposits which we’re trying to eke returns out of with currency plays. We are looking at prime property. These are the areas we are more focused on rather than equities.”
Gray says it’s impossible to see how the eurozone in particular will pull itself out of its long slump, and he is scathing of the politician’s efforts so far.
“The leadership in Europe in particular has been appalling. At least now they seem to have understood what the problem is, even if we seem no closer to a solution.”
“I sold out of everything euro-denominated in 2009 when I saw the writing on the wall and I still see no reason to hold anything in the currency.”