What I like about the market analyst James Montier is the honesty of his approach to following markets. He thinks deeply about the issues and although he is best known as a behavioural finance expert, his analysis is more wide-ranging than just that. In an interview earlier this year he was asked about the single most important challenge facing any investor at the moment – namely, how to build a portfolio in a period when everything seems to be too expensive. This is how he answered:
In other words, he goes, on “you don’t want to be caught reaching for yield”. Yet most investors so far this year, it is clear, are risking just that. The longer markets continue to rise in apparent defiance of traditional valuation methods, thanks largely to central bank policies, the less risky investing for yield appears to be. And yet of course the risks are mounting all the time, as the Bank for International Settlements, the club of central bankers, pointed out in its most recent Annual Report.
So how are things going to pan out from here? Montier sees two, potentially diametrically opposed, outcomes.
And that of most sensible investors as well. Even central banks have been forced to load up with $1 trillion of risky equities since the gobal financial crisis, according to a recent report, having lost some $200bn to $250bn of income as a result of their own post-crisis low interest rate policies. This can go on for a long time, but it can’t go on forever – and it certainly can’t go on much longer without sowing the seeds of a second financial crisis, potentially as bad as the last one.