With $13.1 billion in assets under management, Pershing Square Capital Management is far from the biggest hedge fund out there, but its moves and performance tend to garner considerable attention. That is due in part to the fact that its boss, Bill Ackman (Trades, Portfolio), has never shied away from the spotlight.
Ackman has often shared his unvarnished opinions about the market, the economy, sectors and individual securities. In an interview with Interactive Investor last month, Ackman shared his latest views on the economy and the market, as well as his forecast for 2021.
While Ackman's opinions are not always correct, they are almost always worthy of consideration. His latest interview was no exception, so I pulled out some of the highlights that may be of particular interest to investors.
Expect a quick recovery
The coronavirus pandemic delivered a catastrophic blow to the global economy last year. While things have improved considerably since the initial downturn, the economy is still on shaky footing. According to Ackman, firmer economic ground is in sight:
"So I think you're going to see a fairly rapid recovery beginning sometime late Q2, Q3, Q4, low interest rate environment, a tonne of savings to be deployed. It could be pretty favourable."
Ackman sees the recovery, which has been anemic thus far, picking up serious steam after the first quarter as vaccines get ever wider distribution and fears of another pandemic spike diminish. Reduced anxiety will undoubtedly act as a demand tailwind and should result in a tangible uptick in economic activity. An economic recovery should also bolster investor confidence, which may give the stock market a fresh psychological tailwind as well as attract additional capital that had been held in reserve throughout the downturn.
While I respect Ackman's position, I find it hard to share his optimism. The economic recovery may accelerate as he projects, but the last crisis has left significant scars. They will undoubtedly heal with time, but it may take longer than Ackman thinks, in my assessment.
Stocks still trump bonds
When it comes to asset classes, Ackman has long been an advocate of stocks over bonds. Based on his latest interview, little has changed in that regard:
"I'm not a fan of buying bonds of any kind at current interest rate levels. Think about a long-term instrument. Today the 30-year Treasurys at 1.3%, right; when we think about a company, so for example Lowe's is trading at something like 18 times earnings. You flip over the PE multiple, you know, that's something north of 5%; it's called a 5.5% earnings yield. Which would you rather own, Low's at 5.5% earnings yield where that yield is going to grow at pretty high rate – we think mid-teens or higher rate for the foreseeable future – than buy a company that's generating an earnings yield of 1.3% and stuck there for 30 years and there's no potential for upside. And that's the bond equivalent, and so I think equities are by far the superior alternatives."
A review of modern financial history demonstrates quite emphatically that, in a head-to-head comparison, there has rarely been a time when bonds have outperformed stocks. With interest rates near zero, which are likely to stay there for the foreseeable future, it is tough to see much allure in the bond market in 2021.
On the subject of stocks versus bonds in 2021, Ackman and I are in full agreement. As I have discussed previously, I consider last year's unprecedented government interventions in the corporate bond market to have added fresh layers of uncertainty to the asset class. Stocks may be a bit overvalued compared to historical norms, but they are still the superior alternative.
Look for lean bargains
After a brief correction this spring, the stock market came roaring back to life last year. The S&P 500 index rose an impressive 16% in 2020. The Nasdaq index did even better, rising 43.6% on the back of soaring tech stocks. According to Ackman, investors should expect more of the same in 2021. He thinks investors can still find bargains, especially among companies that undertook necessary cost-cutting measures during the downturn:
"You have a lot of companies that used the crisis to kind of tighten up their cost structure. You know, Hilton cut I think something like 25% to 30% of their corporate overhead costs, and success does breed a certain looseness with expenses and a crisis the opposite. You can have some leaned-up companies coming out into a very strong environment, so I think there's a pretty good chance for a very strong stock market next year."
Many companies, and even whole industries, have been forced to contend with unprecedented shocks to their core businesses in the past year. Those that responded to the crisis with alacrity by slashing costs and reducing overheads may be well positioned to succeed in 2021, especially compared to companies that were slower to react. Ackman appears particularly enthused about some names in the hospitality industry, including Hilton Worldwide Holdings Inc. (HLT, Financial), a long-time denizen of Pershing Square's portfolio.
On this subject, I am largely agnostic. While fear of further serious disruptions from lockdowns is likely to dissipate in short order, there may still be residual effects on demand for things like hotels. Air travel, for example, is expected to take years to return to pre-crisis levels. Similar demand headwinds may weigh on the likes of Hilton.
My verdict
2021 will certainly be an interesting year for capital markets. If the global economy can make a sustained recovery as Ackman expects, the bull market should be able to keep chugging along. At the same time, however, the scars of the recent crisis cannot be overlooked.
On balance, I see, at best, a case for cautious optimism for the year ahead. But investors would be wise to stay on their toes.
Disclosure: No position.
Read more here:
- Lockheed Martin: Big Military Contracts Keep Rolling In
- Tesla Autonomy Hype: Elon Musk Is Playing With Fire
- Exxon Mobil: Preserving the Dividend May Require More Debt
Not a Premium Member of GuruFocus? Sign up for a free 7-day trial here.
