On February 2, 2011, Martin Gray, manager of the CF Miton
Special Situations Fund, spoke with Tim Price and Killian Connolly of PFP Wealth
Management. Part 2 of the interview follows.
Tim Price: Are there any currencies other than
Sterling that you particularly like?
Martin Gray: I’ve been steadily moving toward Asian
dollar currencies over the last 18 months or so. I hold Asian currency funds and
bond funds. That’s as far as I go - I haven’t got any Asian equities or property
to speak of. But I think there’s a misalignment there that will have to correct
itself in due course. I also think that Sterling’s a bit overvalued at the
moment and therefore I’m quite happy to hold some US dollars. I still think that
on any setback the dollar will benefit as a safety currency though further down
the line that may become a little less safe and a little less attractive. The
other currency that I’ve held long term and since 2006/7 is the Yen, which I
continue to hold. I don’t think the Yen’s overvalued. It was at these levels 15
years ago against the dollar, and since then we’ve seen inflation in the US over
40% versus negligible in Japan. Despite their debt situation in Japan I still
think it’s a good currency to hold.
Tim Price: Do you have a view on the Japanese stock
market?
Martin Gray: I have. It hasn’t proven particularly
right in recent times! I’ve had a reasonable weighting, not a huge weighting,
towards Japanese equities, for over a year now. I felt that the DPJ [Democratic
Party of Japan] and their focus on domestic policies would be a boon for the
domestic economy. That has turned out to be not so good so far - they lost their
first prime minister in four months and the next one nearly went about five
months later. But they seem to be trying to get domestic policies through;
politics is such in Japan that it’s proving to be quite hard work, now that
they’re not in control of both Houses.
Killian Connolly: Do you view gold as a currency? What
is your view on gold and silver?
Martin Gray: I certainly have viewed gold as an
alternate currency; back in 2001 I increased the weighting to gold in the fund
to nearly 8% or 9%. Fairly consistently over the last 10 years gold has featured
between 5% and 10% within Special Situations. More recently, since the middle of
2009, I’ve been decreasing that weighting; now it’s probably less than 5% of the
fund. I’ve felt that there’s a lot of speculation on gold and the price has run
away a little bit, and I’ve been concerned about the correlation of the gold
price with other assets. It has moved in the “wrong” direction on a number of
occasions compared to where it should be going as an alternate currency, for
instance the Dubai crisis when it fell $50 rather than rising $50 in a day. I am
a fan of gold but I’m not very happy at these levels so I’d be happy to be
underweight where I’ve been over the past 10 years - but we have made a lot of
money out of gold.
Tim Price: Do you think there’s any such thing as a
safe asset these days?
Martin Gray: Probably not. There’s a risk to pretty
much anything, isn’t there? You might say that gold is the nearest thing to that
because not much sovereign paper these days or currencies can be viewed as safe
with the amount of debt floating around the world. That’s an interesting debate
- probably one for a couple of bar stools and a long evening!
Tim Price: Do you think QE [quantitative easing] will
end, or would you like it to end, any time soon?
Martin Gray: I would like it to end, because it is
creating extremely false markets in asset pricing and we’ve seen correlated
movements in all assets - it was pretty hard to find an asset that fell last
year. We saw back in 2009 and last year that as soon as any announcement was
made that quantitative easing was going to be resumed that asset markets have
gone through the roof in anticipation of that. The liquidity has just sent
everybody into risk assets, down to the casino - however you wish to describe
it. I would like to see it end and am probably positioned for it ending, sooner
rather than later. But I’m not sure the Americans have got much alternative at
the moment.
Tim Price: What do you think is the likelihood of a
rise in UK interest rates any time soon?
Martin Gray: My hope and belief is that there is
little chance of that happening; however, there seems to be a lot of media and
market views that we should be raising rates sooner rather than later. I think
that would be a disaster. I don’t think there’s any necessity for it. Sure, the
inflation numbers are not coming through good, but I do side with Mervyn King on
most of the points he’s been raising. There are short term problems with food
and commodity prices; oil prices are obviously having an effect, ditto VAT. But
I don’t see any basic long term underlying inflation. I think it will be under
control with patience. I think the UK economy is in for a tough time.
Tim Price: What’s your take on how we end up, in a
world that’s drowning in debt? Do we end up with “muddle through” austerity; do
we end up in a deflationary mess; or do we end up in an inflationary or very
inflationary crisis?
Martin Gray: Here in the UK I think it’s austerity,
low growth. Deflation? Possibly, but disinflation or low inflation is how I’m
positioned. The inflation thing is a concern but I think we’d need another two
or three bouts of quantitative easing to really concern me about that. I think
governments are going to be forced by the populace to tighten things up
eventually. I think we’ll have a long, hard grind as we clear up this mess.
Killian Connolly: What’s your view on emerging
markets, and China and India as the global growth drivers? Do you see any
worries on the horizon?
Martin Gray: Yes, I have a number of concerns that
China is eventually going to be forced to get its house in order. I don’t think
we can see these rates of growth and lending continuing forever. There are some
signs that the Chinese authorities want to slow things down a little bit but
they don’t seem to be having too much effect so far. We’re already seeing a
little bit of a setback in emerging markets this year but I think there’s a lot
more to come. I think money’s just wholesale flooded in to those economies with
quantitative easing and created - bubbles - probably the wrong word, but
certainly too much fund flow in the wrong direction where a lot of that money
isn’t really needed and it needs to flow back again. From my positioning I’ve
got no emerging market exposure at all - and this is from a fund that in 2007
and early 2008 still had nearly 20% in Asia and emerging markets, of which
nearly half was in China, so I’ve moved to a very defensive position from there.
I’m quite happy to be out of those markets at the moment. I think there’ll be
volatility to come, particularly as they do have an inflation issue and that may
lead to other problems - trade barriers and those kind of horrible things.
Tim Price: On which note, I think we all head to the
bar. Martin Gray, thank you very much indeed.
