James Anderson, CIO of the Scottish fund group Baillie Gifford from 2006 to 2010, has been managing the Scottish Mortgage investment trust for the past 11 years and is a regular contributor to Independent Investor. In our latest Q and A he offers this notably upbeat assessment of the current outlook for equity investors. Scottish Mortgage is a global generalist trust that has produced a total return of 102% over the past ten years.
How do you see the equity and bond markets at the moment?
The world economy is booming. It is likely to continue to do so. It will probably accelerate as we are in a golden era of emulation and innovation. The sour pundits of London and New York cannot stomach their irrelevance. Accidents can happen though, as history demonstrates. But in general this is a world fit for equities, not bonds.
Are brokers and advisors right to be as bullish about 2011 as they seem to be?
The time horizon of most brokers is three months at most and their opinions reflect the market action of the last three months. We try not to read brokers or to make forecasts. Most though are so scarred by 2008 that structural over-optimism still seems implausible.
What opportunities do you see? Are there any striking valuation anomalies?
Sustainably high returns and growth are rare. We should treasure those stocks that just might offer them. The rest is playing at the edge. But at that edge the hysteria about Europe is another Anglo-American fantasy. Germany is structurally booming (most hate this) and Spain is convalescing well. This offers decent corporate opportunities.
Please give some examples of stocks you have been buying and why?
Tencent; the Facebook of China before Facebook was thought of. It trades on approximately 25 times 2011 earnings, which are growing at 30 percent, but with 600m subscribers and a rapidly expanding offering, those snapspot numbers are of more than usual limited value. The market capitalisation is US$48bn versus a current grey value for Facebook of US$80bn.
Santander; hedge fund and Anglocentric hatred cannot obscure serious banking at a seriously attractive price. The shares are trading at approximately 1.2 x book, and 8x depressed earnings. Naturally these could go anywhere, as we know with banks, but with its Latin American and retail focus, it ‘s a risk that we are happy to take.
First Solar; grid parity is within sight, whilst all obsess about subsidies, as reflected in a short interest recently amounting to 30% of the shares outstanding.
What are you avoiding (or would go short of if allowed) and why?
Japan. This year is said by brokers to be the Year of Japan. They’ve said this for 20 years. Instead it’s a desperately declining nation that is the real candidate for bankruptcy. But I don’t approve of shorting under all but very constrained circumstances. So just an avoid.
What are your thoughts on gold and other commodities?
I don’t really believe in global inflation. China remains essentially deflationary. In the long run commodities don’t rise and the long run is approaching.
How are you positioning your portfolios in currency terms? Do you favour/dislike any currencies in particular?
No yen please! In the long-run the Remnimbi (RMB) will be revalued up by at least 50%. The United States should be very nervous of what it asks for.
Thank you, James.
Jonathan Davis 