Grantham, Mayo, & van Otterloo (GMO) has released its latest 7-Year Asset Class Forecasts through May 2021 warning clients to “concentrate assets where the bubble ain’t”.
The Boston-based asset management firm’s extraordinarily bearish forecast for stocks and bonds predicts a negative annual real return over seven years with only emerging markets value stocks priced to deliver quite decent relative and absolute returns.
“It gives us no pleasure to remind clients that U.S. stocks’ valuations, by almost any measure we can come up with – backward or forward looking – are at levels that concern us,” wrote Peter Chiappinelli
Portfolio Strategist from the GMO Asset Allocation Team.
“Many have wondered aloud whether GMO is not giving enough credit to some of these high growth
new-business-model “disruptors.” First, we have all sorts of models that take current optimistic growth forecasts into account. Many are deserving of their current high multiples — we absolutely concede that somewhere in the Global Growth basket sits “the next Amazon.” Unfortunately, they’re all being priced that way, and that is a bridge too far.”
US large and small caps are expected to sink 7.8 per cent and 8.4 per cent respectively, while international large caps will drop 2.7 per cent.
“We also remind ourselves that during the month of May, the S&P 500’s real earnings yield (the inverse of P:E minus inflation) dipped into negative territory, the lowest in 40 years. Even at the height of tech bubble mania this scary event did not occur,” Chiappinelli wrote.
“Combine that sober statistic with the negative real yields being offered by sovereign bonds, and you may come to see why we are loath to recommend a traditional 60/40 mix. There will come a day when global equities and government bonds are fairly valued and should deliver a ‘normal’ real rate of return. Today, however, is not that day.”
Nevertheless, Chiappinelli says that May’s forecast is not all doom and gloom.
“Emerging Markets Value, which has rallied strongly in the past year, with the MSCI EM Value index up 49 per cent, is still priced to deliver quite decent relative and absolute returns. Japan small value stocks are also quite attractive.”
“Further, the valuation spread between global Value and Growth remains at some of the widest levels we have seen in our working careers, and there are all sorts of interesting ways to exploit this dislocation. Importantly, valuation spreads across asset classes more broadly in rates and FX and commodities, represent huge opportunities in non-traditional long/short space” Chiappinelli wrote.
Earlier this year, GMO founder Jeremy Grantham had warned the market bubble will burst soon.
In a global Growth bubble, GMO is telling its clients the best way to deal with that bubble popping is by doing three things: exploit the bubble (via equity long/short), avoid the bubble (via alts), and concentrate assets where the bubble ain’t (EM Value, Japan small Value, Cyclicals, and Quality).