Mon, 12 Sep 2011
High-quality global companies domiciled in the developed markets are offering very undemanding valuations, says BlackRock's Dennis Stattman.
Holly Cook: I'm Holly Cook for Morningstar, and I'm joined here at the Morningstar Investment Conference by Dennis Stattman. He's head of BlackRock Global Allocation. Dennis, thanks very much for joining me.
Dennis Stattman: My pleasure.
Cook: Now, you manage a truly go anywhere fund. You invest in equities, a huge range of fixed income. Are there any areas where you've seen particular value or you're particularly excited about?
Stattman: Right now the best value that we see is in large, high-quality companies that are domiciled in the developed markets but which do business globally. By doing business globally, they're benefiting from the growing areas of the world economy, but because they're domiciled in the developed economies, which are regarded as slower-growth at this point, many of them have very modest valuations. For example, if we look at something like the S&P 50 largest stocks and look at consensus earnings for 2012, there are only six companies right now with a P/E ratio of 15 or higher. There are 16 of those 50 companies with a P/E ratio below 10. Those are simply very undemanding valuations and represent some of the best value that I've seen in my career.
Cook: I know that you mentioned in your panel discussion earlier that you were looking at Japan, for example, and how really the valuations are undemanding there. Can you expand on that a little for me?
Stattman: Of course, so many investors have given up on Japan, and indeed Japan as a country and as an economy has its problems. But at the same time, Japan's been through a 20-year-long bear market, and a 20-year bear market will cure lot of excesses.
Today, Japanese stocks are the cheapest relative to their own history and cross-sectionally relative to other regions and countries that we've ever seen. There are many high-quality companies in Japan, and let's keep in mind that the competition from fixed-income yields in Japan is very weak. Yields are very low.
Cook: So on the flipside of that, where perhaps are you more wary? What, for example, keeps you up at night?
Stattman: There are things we're wary of and there's something that keeps me awake sometimes at night. What we're wary of is long-term sovereign bonds, particularly in the U.S., where we think the yields that are being offered are simply not commensurate with the risks of higher inflation and higher interest rates.
The U.S. has a cyclical budget deficit problem, and it comes in front of a big problem secularly with a tidal wave of entitlement spending for Social Security, Medicare, and Medicaid that is no longer decades into the future, but rather is at hand. So we don't think at 3% or less 10-year Treasuries investors are being compensated for that.
Now what keeps me up at night and very, very few times in my career have investments kept me awake at night, but the question that I keep fretting about is what represents a truly safe asset today. It used to be that something like for a dollar-based investor, a Treasury bill would be a safe asset. But because the Fed has tripled the size of its balance sheet in a short period of time and made the outlook for future monetary policy and the number of dollars in circulation very, very hard to predict, it's hard to understand what sort of role the dollar will play as a store of value. And if we can't count on the dollar as a store of value, then for safety in real terms, we have to look at real assets. The problem with trying to use real assets as safe assets is their prices are volatile. So in order to get real safety, one has to take on nominal price volatility. Looking for what is safe and understanding it today is a question that does keep me up at night.
Cook: So the risk environment has actually fundamentally changed then?
Stattman: I think it really has, because when one loses one's home currency as a reliable store of value and a reliable safe haven over the long term, that greatly complicates an investor's problem.
Cook: Well, Dennis, thank you very much for joining me today.
Stattman: It's been a pleasure. Thank you.
Cook: For Morningstar, I'm Holly Cook. Thanks for watching.