Sharmin Mossavar-Rahmani is the CIO of the Private Wealth Management Group at Goldman Sachs where she guides the investment strategy for clients with over $US10 million in assets.
Mossavar-Rahmani joined Business Insider’s Sara Silverstein to discuss Goldman Sachs’ 2018 Investment Strategy Group Outlook. She says she is not worried about equity valuation levels or inflation and is telling investors to stay invested. Following is a transcript of the video.
Sara Silverstein:Sharmin is the chief investment officer of Goldman Sachs’ Investment Strategy Group. You guys came out with your 2018 outlook and one of the things that stuck out, I’m sure, to a lot of people is that you don’t think valuations are particularly too high. Do you think that they’re really sustainable at the levels that they have been at?
Sharmin Mossavar-Rahmani:When we talk about valuations with our clients, we tell them they need to think about the context. What’s the overall context in which we’re looking at these valuations? When we look at environments where inflation is low, and very importantly, the volatility of inflation is low, which is the environment we’re in, the market has typically sustained much higher valuations. So if we look at a range of market valuation measures, whether it’s Shiller CAPE, whether its price-to-book, whether it’s price-to-trailing earnings, price-to-peak earnings, when we look at these measures, they look like they’re in the, what we would call, the 10th decile, meaning generally, valuations are cheaper 90% of the time.
And when we look at the long-term average, it looks like they are 70-plus per cent overvalued. However, when we look at valuations and compare them to periods of low and stable inflation, it only looks like it’s about 20% overvalued. So the level of overvaluation is not as high as people are thinking.
Silverstein:And so if you’re in a period of low and stable inflation, the valuations don’t look that overvalued. But what happens when inflation rises?
Mossavar-Rahmani: So the key question for us is to monitor carefully several things, one of which would be inflation. But we’re actually not concerned about inflation. And inflation has been a topic now for several years. Everybody is looking for inflation to be just around the corner, and it hasn’t. Some of this, in our view, is driven by major structural forces. Globalization creates many more opportunities for companies to reduce their costs. So as long as that continues and exists, and you look at companies trying to find the cheapest source of, whether it’s labour, whether it’s manufacturing resources, then we think inflation is going to stay subdued and within the targets that the Fed is looking for. And it’s not just inflation in the US, but inflation globally, whether we’re looking at Europe, or whether we’re looking at, let’s say, Japan.
Silverstein:And if you like US equities, are you worried at all about tech, ’cause they have been leading the rally? And their valuation, some think, are the most overvalued of any.
Mossavar-Rahmani: In our view, this concern about the tech sector and saying that this looks like the late ’90s, 2000, is a bit misplaced, this type of concern. Because when you actually look at the relationship across sectors, and you look at their valuations based on return on equity, or other measures, all sectors seem to be about fairly valued.
If you looked at 2000, information technology was substantially overvalued relative to other sectors in the equity market. For example, if you looked at the return on equity and what you paid for that, you were paying two and a half times more for the technology sector’s return on equity relative to other sectors. So that was a big dislocation.You don’t see that anymore.
In fact, there have been a lot of articles and commentary about the impact of the FAANGs, meaning, sort of, Facebook, Apple, Amazon, Microsoft or Netflix, depending on what people like to use, and Google. And if you take those out of the S&P, people will say S&P returns have been anemic. That is factually not correct. In fact, if you take the returns, let’s say, for 2017, about 22%, and you take out the FAANGs, you’re left with about a 19% return. That means other sectors have done quite well. So even though technology has outperformed, broadly, we don’t think it is overvalued relative to other sectors in the market.
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