GMO 7-Year Forecast, Stick with Equities Especially EM


At the bottom of this article is a chart containing GMO’s seven-year forecasts for a variety of asset classes. Comparing these numbers to prior months, one can see a clear trend: as valuations have gone down, GMO now is increasingly bullish. They expect emerging markets to have 6.8% annual real returns. They also like intl large and high quality large cap. With CAPE above 20 indicates returns will be closer to 2% for the S&P500, which is close to GMO’s estimate of 1.4% of large cap US stocks. John Bogle recently stated that investors should expect real returns of 1-2%.

Besides emerging markets, bonds are expected to have negative returns.

Jeremy Grantham describes what GMO means by high-quality U.S. stocks in an interview with Morningstar: “It’s high return, stable return and low debt.” And, “Quality is quality; we kind of know what it is. It’s a great franchise company.” However, no exact metrics have been stated.

Here’s what Charlie Munger had to say at the Daily Journal meeting

Charlie MungerCharlie Munger spoke at the Daily Journal Corporation's Annual Meeting of Shareholders today. Although Warren Buffett is the more well-known Berkshire Hathaway chief, Munger has been at his side through much of his investing career. Q4 2020 hedge fund letters, conferences and more Charlie Munger's speech at the Daily Journal meeting was live-streamed on Yahoo Read More

I assume they (GMO/Grantham) are referring to blue chip stocks, with strong balance sheets and high dividends, stocks such as Coke (KO), Proctor & Gamble (PG), Johnson & Johnson (JNJ) and other Dow components that have pricing power. However, I have never seen the exact criteria for what qualifies as high quality.


Below are the top 10 holdings from GMO’s Quality mutual fund, which likely would give the best quantitative definition of high quality:

Top 10 holdings

Security Net Assets
Microsoft Corporation (MSFT) 5.78%
Johnson & Johnson (JNJ) 5.74%
Cisco Systems Inc (CSCO) 5.15%
Philip Morris International, Inc. (PM) 4.89%
The Coca-Cola Co (KO) 4.37%
Oracle Corporation (ORCL) 4.31%
Pfizer Inc (PFE) 4.02%
Apple, Inc. (AAPL) 3.72%
Wal-Mart Stores Inc (WMT) 3.38%
Google, Inc. (GOOG) 3.21%

It also is hard to group all emerging market countries together. The economies of Russia and India, for example, are far different just based on demographic trends. However, the media just sticks them all together regardless.

However, in Jeremy Grantham’s recent quarterly letter, he explains why he thinks returns in emerging markets will be so high. Here is the quote:

Emerging markets are hard to evaluate because they are clearly going through many phases of development in areal hurry. So what is normal pro?tability? Probably not the old levels. They are moving toward developed status and probably toward our developed world’s level of pro?tability. (Yes, James Montier, that would be a change and, therefore, I admit, far from certain.) In a global ?nancial crisis it is also important to remember that their cumulative foreign reserves are remarkable, twice that of the developed countries. But, all things considered, I believe they will outperform other non-high-quality equities for the next seven years and are likely to produce a semi-respectable return for a risky group of about 4% to 5% a year real.

Overall, this chart is slowly gravitating towards more bullish views. This largely agrees with my monthly valuation article, which confirms that stocks are getting more attractive.  One note, Grantham has put fair value of the S&P500 at 950, which would imply a very large drop from current levels.

Last months article-

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