The chairman of Legg Mason Capital Management says current estimates of economic growth are much too conservative, based on a historical view of markets. Miller says: “The consensus view is 2.6 per cent GDP growth in 2010, and the Federal Reserve forecast is 2.7 per cent. The inside view is an over-indebted consumer, risk aversion, and government stimulus. If you look at history, you can calculate the probability of a new norm. Every month, corporate profits and GDP expectations for 2010 have been revised higher. Profit growth has consistently exceeded expectations.
“The outside view is 7 per cent to 8 per cent GDP growth for 2010, which is miles outside the consensus. The consensus forecast is inconsistent with the data flows we’re getting, and with history. The probability of growth being higher than 2.6 per cent is much higher than the market believes, and the probability of it being lower than what the market believes is much lower.”
Miller says he is not unduly worried about the effects the eventual withdrawal of government stimulus will have on markets and the economy. “I am not terribly concerned about that, as unprecedented stimulus was in response to unprecedented decline and an unprecedented fall in consumer spending.
“The commercial paper market showed that the stimulus put into it kept it going, and when it recovered, the government backed off and it was okay. The problem for markets in terms of interest rates has been the move from normal to tight, rather than the other way around.”
Miller has positioned his £264m value strategy fund to take advantage of what he sees as a strong outlook for mega-caps. “Risk/return over several years favours mega-cap names,” Miller says. “That locus of growth is well founded. Valuations are much more depressed and mega-caps give access to non-US earnings. They will have relatively faster growth than their smaller counterparts.”
Equities in general are set to outperform, with valuations at attractive levels, the manager says. “Money is pouring out of equities and into bonds in the US — we are seeing the highest inflows ever. People tend to follow trend and outlook not valuation, but valuation right now is all in favour of equities rather than fixed income. The portfolio is positioned very well. There are a lot of great values in the equity market, even with the recent rise.Valuation right now is all in favour of equities rather than fixed income”
Miller’s largest weighting is to the technology sector, with holdings in Cisco, Hewlett Packard, and IBM. He also likes financials, and predicts they will perform well in the coming years. “Every bank has said their losses are less than half what the stress test said, and of course they all passed the stress test. Financials have been the leading group in the market, and will continue to do well for the next two years.”
Bank of America, for example, has paid back its TARP [Troubled Asset Relief Program] money, and has one-quarter of the entire American mortgage market, Miller says. It has also seen its major competition diminish as Bear Stearns, Lehmans and Washington Mutual fell victim to the credit crisis, he adds.