What Bill Ackman thinks will happen to stocks in 2021

In an exclusive interview with interactive investor, watch what one of the world’s best-known investors has to say about the global recovery, the sustainability of the stock market rally and his view on the UK as an investment destination. 

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You can watch the other two videos in our three-part series here: 

• Bill Ackman: where I invested billions in 2020
• Bill Ackman's top share tip for 2021 

Lee Wild, head of equity strategy, interactive investor:

Hello, today I have with me Bill Ackman, one of the world's best-known investors and the man behind hedge fund Pershing Square Holdings (LSE:PSH). Hello, Bill, thanks for joining me. 

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Bill Ackman, founder and chief executive, Pershing Square Holdings:

Thanks for having me.

Lee Wild:

The COVID-19 pandemic, it's hit the global economy hard, it still is. Stocks have recovered sharply though, so the level of recovery has been quite astonishing in some quarters, so is this sustainable? Do you think stocks will keep moving higher in 2021?

Bill Ackman:

So I'll give you a kind of a US-centric perspective and some of it I think applies globally. You know, the stock market, as I like to say, it's not a fair representation of the global economy. It's an important reflection of global economy, but it doesn't represent the smaller, less well-capitalised, less technologically enabled companies. Think private, family owned, smaller, up-and-coming businesses.  

The S&P 500, for example, represents probably the 500 most dominant companies in the US, in some cases in the world. What COVID has done, what the pandemic has done, is it's really disrupted the less - you know, companies with bad balance sheets, without being technologically enabled, have been impaired and many of them - unfortunately the smaller ones – have gone out of business, whereas the well-capitalised dominant companies have actually improved their market conditions.  

So surviving a pandemic, or having the ability to survive a pandemic, puts you in a strong competitive position coming out of it. If you think of a simple example, Starbucks is a significant holding [of Pershing Square Holdings (LSE:PSH)]. Think about how many fewer coffee shops they're going to be competing against. One of their principle competitors in China, a company called Luckin (NASDAQ:LK), that was building a very large number of stores every year, turned to have been a fraud. When the tide rolls out, you see who’s swimming naked, so to speak.  

So the same thing is really true for Hilton (NYSE:HLT). Hilton is really not a hotel company as much as it is a brand, where they sell their IP and their brand and their marketing and their millions of customers on loyalty programs through hotels around the world.

Well, it's probably more important today for a hotel to have an affiliation with a top brand so that the customer can feel comfortable about their, for example, cleanliness standards. The smaller independent hotels are going to be more challenged. So we think the Hiltons of the world are going to take more market share.  

And so, I do think we are set up for a very strong recovery in 2021. I think the virus is going to be a fright and a disaster for the next – call it 90, 120 days – so that's the big negative news in the short-term.

But we have multiple successful vaccines and probably more coming; we're going to have fairly wide distribution of those vaccines beginning as early as 30 days from now, and I think by the second half of next year we'll be probably out of the pandemic for the most part in the first world.  

And I think, you know, you have a new President coming in who's going to be very concerned about the economic recoveries. I don't think Biden's going to take any steps to increase corporate taxes, for example, or even personal income taxes.

You have Janet Yelland now running the Fed, who's going to be I think quite supportive of employment and, from the commentary, you can expect low interest rates.  

You have well-capitalised banks, and then you have a large build-up of savings on the part of Americans and really globally, as people haven't spent, haven't gone out to eat, they haven't gone out to the theatre, they haven't gone to a movie, they haven't gotten on a plane. And I would say animal spirits are building up.   

Don't know about you, but I am – the moment I first can actually travel and go places. So I think you're going to see a huge recovery, even in business, you know.  If you're in any kind of business and you haven't been to see your clients, your customers, the first thing you should be doing is getting on a plane and going to see all your relationships, because your competitors are going to be doing that.  

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. And then 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.

Lee Wild: 

OK, that's good news. Your fund particularly is very concentrated, as you've already mentioned. I mean how do you reconcile the extra risk of having so few holdings with the potential reward?

Bill Ackman:  

Sure. So [Warren] Buffett describes – he says diversification is protection against ignorance - so if you don't know what you own, you want to own a lot of things. Our business is different. We own 10 things.

We tend to own them for years. We have some holdings we've owned for a dozen years, some eight years, four years, six years. We're looking for businesses we can own for …  The whole goal behind getting permanent capital is we never wanted to be forced to sell something because of investor capital flows.  

We're now in that position of 87% of our assets are in Pershing Square Holdings. So one, we have the time to do our homework. We might identify one, possibly two, new investments a year.

Second, of course, these are businesses we've gotten to know quite well over time. But most importantly, we've selected businesses for their inherent robustness, right, so almost all of our companies are strong investment grade companies, so there's not a balance sheet threat to the businesses we own.

They tend to be very dominant, whether it's Hilton or Starbucks (NASDAQ:SBUX), in their respective industries, so they're important dominant, large-cap businesses.

They're in businesses that we can understand and they're businesses that we think are not at great risk of disruption, and we spend a lot of our – a big part of our job is saying we're looking for the highest quality businesses in the world.

And so, if you own a big, you know, 10 stocks that were sensitive to energy prices or interest rates or regulatory risks, or they were highly levered, then you've got enormous risk.  

You know, owning 10 incredible businesses with strong balance sheets and excellent management teams, then you're large influential shareholders, you can encourage them to do smart things and you can discourage them or prevent them from doing things that would be destructive; you're actually better off owning a concentrated portfolio and owning the 10 best things you can find.

And even owning 20 things where we're not going to – ideas 11 through 20 – are not going to be as good as ideas one through 10. And that's really the strategy.

Lee Wild:  

Your fund is US focused, but I'm really interested to hear what you've got to say about the UK as an investment destination. What do you think? Is it investable now, or when we have more information on Brexit? It's clearly going to have an impact on the currencies at the moment, what's your view on the UK?

Bill Ackman:

I would say I'm not a domain expert on the UK. I certainly enjoy coming to the UK as a tourist and, you know, obviously occasionally on business, but I'm not sure I could give you a particularly keen insight.

All of that being said, all the same things I said about the US are really true in the UK and, although you didn't have the same election uncertainty we did with the President, I think the Brexit uncertainty is kind of the same thing.  

So I think Brexit being resolved, frankly one way or another, will lift the cloud of uncertainty, and then you have the same – you know, I assume the Brits have the same animal spirits we do in terms of getting out and going to the pub and going for dinner and getting on a plane and travelling.

So I think you can see a global economic recovery and reduction in uncertainty, and the combination of those things should be good for stocks.

Lee Wild:

And are you a believer in the TINA effect, There Is No Alternative to equities? Clearly, when interest rates are next to nothing where else do you put your money?

Bill Ackman:  

I agree. 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 Treasury's 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. What are people looking at? They're investing in bitcoin, which is a much more complicated question.

But I feel very comfortable owning 10 phenomenal businesses that if the stock market shut for 10 years and we woke up 10 years from now, those companies would be a lot more valuable. And you can't say the same thing about bonds.

I do think interest rates are largely bounded by zero - not entirely bounded by zero - but betting on rates going negative is a short-term trade not a long-term one.

Lee Wild: 

Bill Ackman, Pershing Square Holdings, thanks very much for joining me today.

Bill Ackman: 

Thank you so much, appreciate it.