Having seen his fund return nearly 20 percent last year and over 5 percent in January, Pedro de Noronha, managing partner at Noster Capital in London, is getting a little nervous that a bubble created by central banks' loose monetary policy might burst.
"If we are indeed witnessing the third liquidity-induced bubble in a little over ten years (this time fuelled by public, not private sector debt), we are fearful that there could be severe consequences for the market over the medium term," de Noronha said.
"We won't hesitate forsaking some upside for the fund in order to ensure that we will be in good standing to take advantage of very compelling opportunities that will arise should such a financial event occur," he added.
"While valuations are not yet stratospheric we question where the support may come from for continued earnings growth in 2012 and 2013," de Noronha added.
Mind the Value Gap
As a value investor, de Noronha has to take a long-term view to reap significant returns but warns the value trap lies in wait for those who miss important signals.
"In order to reap the complete benefits of value investing, there are times when investors need to be patient enough to allow the market to concur that the current value of a particular company may not equate to its true intrinsic value," according to de Noronha.
"The gap between the two can take some time to narrow and, as a result, it is important that we 'get paid to wait' – in the form of dividends," he said.
"However, a value investor must be constantly cautious of the prospect of a 'value trap' – a stock that looks extremely cheap on paper – but which can remain so for a few years."
"As the market is a discounting mechanism, stock prices today will be affected by investors' estimates of earnings in 2012 and 2013, and if the consumer cannot offset the fading support of the world's central banks and national governments, true market P/E multiples may indeed be higher than they currently appear," de Noronha added.
Pedro de Noronha’s Noster Capital fund is long the energy and agriculture industry but is shorting a number of stock indices. The fund is short the euro and the British pound.
Clarification: A previous version of this story said Noster Capital is long the euro. Noronha later explained that, being an euro-based fund and having only 40 percent of the fund in euros, it actually means the fund is short of the euro.