Bob Huebscher over at Advisor Perspectives just published an interesting article that gives an overview of Grantham, Mayo, van Otterloo & Co.’s (GMO) outlook for the coming years. The article is based on a talk given by Ben Inker, head of asset allocation at GMO.
Most investors who are aware of GMO first encounter the Boston-based investment management firm by reading some of the brilliant essays of Jeremy Grantham, one of the firm’s founders. Grantham’s market outlooks have historically been prescient.
A Bleak Outlook?
GMO’s broad outlook for investors — the firm manages $107 billion in assets — has changed since last year. In early 2010, GMO was predicting “seven lean years” and it was not too hard to see why. The bright spot back then was “high quality stocks” and my own research was remarkably consistent. Over 2010, the market has rallied, with the result that valuations are considerably higher today than a year ago.
GMO’s Inker offers a fairly bleak outlook. While valuations across a range of asset classes looked attractive in early 2010, they look too high-priced today. GMO believes that equities will very slightly beat inflation over the next 6-7 years, not nearly enough return to compensate investors for the risk of owning equities. Bonds also don’t look attractive, with government bond yields at 60-year lows.
Where To Invest Now
In terms of actionable advice, here are three take-aways:
- High quality stocks look more attractive than most other opportunities.
- Emerging markets look reasonably attractive, albeit somewhat over-priced.
- Government bonds provide too little return to be worth the interest rate exposure.
“Lean” investing options indeed.