Interview “Europe is much cheaper than the USA”

Fund manager Michael Keppler
Fund manager Michael Keppler

Mr. Keppler, many stock markets reached new highs in the Corona year 2020 or are close to their record highs. Given the pandemic and the resulting recession, is that justified?

The world has continued to be inundated with liquidity this year, much of which has flowed into the capital markets. That made prices rise. Whether this is justified will be decided in the long term. But if the economy picks up due to the stimulus measures, then the prices are definitely justified. You also have to see: expectations have fallen. At the low at the end of March, we were still expecting an increase of 14 percent per year for the next three to five years, now we are only expecting 6.1 percent. But that’s still a lot when you consider the low inflation and other investment opportunities in the capital markets. So, given the low interest rates, stocks aren’t overpriced.

The stock markets usually have several months ahead of the economy. So have you anticipated the recovery from the pandemic?

For the most part, yes. So the question now is how much the economy will catch up. When you consider that we now have a vaccine, and fiscal policies often have a year lead time, one can imagine a strong recovery. In any case, the stock market will in future be more influenced by the development of fiscal policy than by monetary policy.

How have you positioned yourself in your equity funds in the months since the outbreak of the Corona crisis?

We have shifted more than usual because we see clear differences between the companies – think of the airlines or the tourism industry.

You are one of the best known and avowed value investors. What characterizes this investment style for you?

As value investors, we act like cautious merchants who are reluctant to spend too much on an uncertain future. This is also the principle of Warren Buffett: The balance sheets for the past five years are more important to me than a forecast by the board of directors for the next five years. Forecasts often say more about the forecasters than about the future. Company earnings forecasts are so unreliable that we pay little attention to them. We choose the cheapest companies, industries or markets – in relation to what is earned today and what we believe can be earned as the norm by a company.

At companies like Tesla, investors apparently like to pay for the future.

We are basically not friends of Tesla. The stock is too expensive and therefore does not fit our investment style. You have to see the realities: While Tesla apparently can’t go wrong, the efforts of the three German automakers in the direction of electric mobility are being completely ignored.

Can’t a look into the past also cloud the view of the future in view of the enormous structural breaks that have intensified as a result of the corona pandemic. Companies that were top performers three years ago can be big losers three years from now.

Structural breaks are difficult to assess for investors. But here, too, value investing offers us a solution – through the back door, so to speak, namely in the form of a safety margin.

What does it look like?

In value investing, the focus is on a low price in relation to profits, dividends or cash flows. This creates a safety margin in case something bad happens. Our portfolios are better suited to deal with this than someone who says price doesn’t matter. Or worse: the course is always the right price. The precautionary principle does not help us to recognize such structural breaks and to act on them – they are usually not clear when they occur. I’ll give you an example: at the beginning of the last century, we had 500 automobile companies in the United States – today there are still three. And most of them were not taken over, but went bankrupt. New industries are always associated with big question marks and risks, and as value investors we don’t like to be in the front row.

Technology stocks are no longer entirely new.

We see the so-called FAANG shares with their charismatic board members. But we don’t see the losers that the technology industry has seen. If five companies dominate the profits of an industry today, the question arises whether they could have been identified in 2000 or 2010. And even companies like Microsoft that are in an excellent position today, took more than 15 years after 1999 to reach their highs again. During this period, the Global Advantage Major Markets High Value fund we manage has almost tripled.

Now you speak like an index investor who says: I don’t know which companies are surviving or doing well anyway, so I’d rather buy the broad market and end up with the winners.

Of course we don’t do that.

I know. Still the question, how do you move in the expensive stock market?

The US is one of the most expensive stock markets today, with a Shiller P / E of 33, which means the stock market is valued at 33 times the average earnings of the past ten years. Accordingly, our expectations for the US stock market are very modest. Today Europe is much cheaper than the USA, the same applies to the Asian markets such as Singapore and Hong Kong. I would bet the US will underperform in the next decade based on today’s high valuation.


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