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Current asset prices not irrational: Howard Marks

Many asset prices are fairly priced in terms of earnings yield vs. 10-year Treasury yield

Jul 30, 2021 (Gmt+09:00)

Howard Marks, co-founder and co-chairman of Oaktree Capital Management
Howard Marks, co-founder and co-chairman of Oaktree Capital Management

Many asset prices have skyrocketed to their highest-ever levels as interest rates remain historically low, but that does not mean their current valuations make no sense, said Oaktree Capital Management’s co-founder and co-Chairman Howard Marks.

"While the possibility of rising rates (and thus lower asset prices) troubles us all, I don’t think it can be said that today’s asset prices are irrational relative to rates," he said in a memo published on July 29.

He cited the earnings yields of the companies in the S&P 500 index, calculated as annual earnings per share. Their average earnings yield is currently between 4% and 5%, which seems fair relative to the yield of roughly 1.25% on the 10-year Treasury note.

In comparison, the post-Wolrd War II average of their earnings yield is estimated at 6.7% which he said appears too high relative to the 10-year Treasury yield.

"That tells me (current) asset prices are reasonable relative to interest rates."

Despite growing market talk of asset price bubbles and rising inflationary pressures, Marks advised against sharply reducing market exposure, adding that investments should be made taking a long-term perspective.

For those strongly worried about the inflationary risk and interest rate hikes, he recommended floating-rate debt, businesses with largely fixed costs or the ability to pass on cost increases, as well as companies of which profits can grow faster than prices rise.

The KED Global Edition exclusively carries the full text of the memo. To read the full text, click here

Yeonhee Kim edited this article.

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