At a recent event organised by Jupiter Asset Management, Terry Smith suggests investors should reconsider using the bond rate as a base rate for returns. Here’s an excerpt from the event:
Critics of these defensive stocks argue they have become too expensive. But while Smith concedes that the sort of stocks he likes have become pricier, he argues that value has not gone away.
‘There is no doubt that we’ve had to adjust our set in terms of what we are prepared to accept as value,’ he said.
‘But all valuations are comparative to some yardstick. There is no such thing as an absolute valuation. If the yardstick you really have to start with is bonds, priced as they are, it sets a rather low mark.
‘If you are talking about Nestle, would you rather own the bond, the 10-year bond which has a negative half a percent yield to redemption, or the ordinary [shares] which have about a 3.3% yield?’
‘Unless you absolutely have to know that you can have the money at the par value of the bond at any time that you want it, or you are a Swiss bond fund manager, or you are mentally unstable, you’d want the equity rather than the bond, I would suggest.’
You can read additional excerpts from the event here:
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