Investment firm that called the 2008-09 crash doesn’t like most stocks or bonds
By Brett Arends
Published: July 8, 2016 7:44 a.m. ET
Here’s some free investing advice that typically costs $5 million
You need a portfolio of at least $5 million to get in the door as a client at Boston-based money management firm GMO.
And with some reason. The firm is famous for predicting the last two financial crashes ahead of time, and firm chairman Jeremy Grantham is a legendary figure on Wall Street. His quarterly letters are required reading by anyone managing other people’s money.
GMO is usually seen as too bearish, but in an industry that is generally far too bullish that’s no bad thing. And often forgotten is that the firm has made some terrific contrarian buy recommendations too — such as emerging markets and value stocks at the start of the last decade, and of stocks generally in the wake of the 2008-09 crash.
But for those of us who don’t have $5 million or $10 million knocking around, what’s GMO’s best advice at the moment? To find out, I spoke to Matt Kadnar, a member of the firm’s asset allocation committee. Here’s what he said about how GMO perceives the current global investing environment:
1. The overall investment outlook is really, really dismal. «There is no asset out there that is cheap,» Kadnar says. None.
2. The outlook for U.S. stocks is terrible. GMO’s central forecast — which is a directional estimate more than a precise prediction — warns that U.S. large- and small-cap stock indices are now both so overpriced compared to history that they will probably lose value, compared to inflation, over the next seven or so years.
3. In the wake of the emerging markets slump and now Brexit, investors are becoming almost as dangerously fixated on U.S. stocks as they were (disastrously) in 2000, according to GMO. Kadnar says that once again, clients are starting to ask why anyone needs to own anything other than the S&P 500 Index SPX, +1.53% .
4. Investors also are likely to end up losing — after inflation — over the next seven years or so on U.S. bonds, cash, and small-cap international stocks, GMO’s current central forecast predicts. The firm also sees minuscule post-inflation, or «real» returns, on both international large-cap stocks and emerging-market bonds.
5. The global markets’ plunge following the «Brexit» vote has left the British pound GBPUSD,+0.3409% only «moderately cheap,» which means it is far from a contrarian steal.
6. GMO says opportunities still exist in non-U.S. «value» stocks — meaning shares of more stable, lower-growth companies with high dividends in relation to the stock price. The value stocks in developed regions such as Europe and Japan are likely to earn around 2.5% a year in real terms over the next seven years, GMO figures — worth a roughly 20% gain in purchasing power. (A proxy for this strategy is iShares MSCI EAFE Value exchange-traded fund EFV, +1.71% which charges 0.4% in fees per year.)
The best investment prospect now: emerging-market value stocks
7. Also, GMO believes that emerging markets still offer a reasonable investment case, despite this year’s rally. As of May 31, the firm’s central estimate sees the emerging-market stock indices earning about a 34% real return, in aggregate, over the next seven years. Not bad, though not a great reward for all the risks involved in volatile emerging markets. (One way to play this strategy is with Vanguard FTSE Emerging Markets exchange-traded fund VWO, +2.22% , which charges expenses of 0.15% a year.)
8. The best investment prospect now: emerging-market value stocks, which according to GMO can be expected to deliver a thumping real return of around 7.7% a year over the coming seven years, equal to an overall gain in purchasing power of about 70%. But such stocks may entail plenty of risk, Kadnar warns. (One exchange-traded fund to follow this strategy is iShares Emerging Markets Dividend ETF DVYE, +2.01% , which charges 0.49% a year in expenses.)