Many investors are focused on how their trades will affect their portfolios in the immediate term. But what about playing the long game?
The asset allocation team at Grantham, Mayo, & van Otterloo— which currently oversees $60 billion — is here to help with that. The group isn’t afraid of making against-the-grain calls — and they’ve made this notion explicitly clear in their latest round of projections.
Here’s how they see 11 major asset classes performing over the next seven years.
- US large-cap stocks: -3.7%
- US small-cap stocks: -1.5%
- International large-cap stocks: +0.6%
- International small-cap stocks: +1.9%
- Emerging-market stocks: +5.2%
- Emerging-market value stocks: +9.8%
- US bonds: -1.7%
- International bonds hedged: -3.7%
- Emerging-market debt: +0.7%
- US inflation-linked bonds: -1.4%
- US cash: +0.2%
As global growth has slowed, corporate earnings have waned, and trade tensions have spiked, both developed-market bond and stock markets have ripped higher. But GMO thinks the torrid pace of appreciation can’t continue much longer, leading the team to dampen future expectations.
“GMO’s 7-Year Asset Class Forecasts for both stocks and bonds have generally declined in 2019, predominantly due to strong appreciation in asset prices,” said Rick Friedman, a member of GMO’s Asset Allocation team.
He continued: “With global equities up nearly 17% through July (and a more impressive 19% in the US) and interest rates lower globally, our forecasts for US and international stocks have declined as has our outlook for bonds (US, International hedged and Emerging).
Put briefly, don’t overstay your welcome. What worked in the past isn’t guaranteed to work in the future.
As a whole, GMO’s projections are lower across the board, barring emerging-market stocks and EM value stocks. They’re unloved areas of the market that the team has affinity towards going forward.
“We continue to favor Emerging Market Value stocks which are trading cheap relative to our long-term equilibrium assumptions,” Friedman added.
This is an interesting call. Both EM and EM value stocks have widely underperformed US markets for years on end. Couple this notion with a strengthening US dollar and GMO’s forecasts become even more bold. What’s more, neither of the two trends show any signs of stopping.
To be clear, this isn’t the first time GMO has flirted with the idea of piling into EM. In fact, Jeremy Grantham, the cofounder and chief investment strategist at GMO, has been bullish since 2018, stating “I like emerging markets, particularly because, in this mess of changing variables, the asset-class level tends to be pleasantly old-fashioned,” and “They’ve underperformed the US market by 10%, making it 10% better. Emerging looks to me like the future. The prices are cheaper. What’s not to like?”
For investors looking for EM exposure, these two exchange-traded funds could do the trick:
To sum up, it looks like it’s going to be a rocky road ahead for investors who favor US holdings. And although being overweight the US has historically been a winning strategy, a new era may soon be upon us.