James Montier: Get Out of U.S. Equities and Into Emerging Markets

According to James Montier, now is the time to allocate away from U.S. equities and into emerging markets.

Montier is a member of the asset-allocation team at Boston-based Grantham, Mayo, Van Otterloo & Co (GMO). Before joining GMO in 2009, he was co-head of global strategy at Societe Generale. He's a regular contributor to GMO's library of white papers and research studies on topics ranging from productivity to strategic asset allocation to contrarianism, and more.

But Montier’s message is not new for those who have followed GMO. For the last decade, GMO has consistently forecast poor performance for U.S. large-cap equities.

And it has been wrong.

Its widely followed seven-year forecast has predicted annual returns at or below zero for large-cap U.S. equities, but the actual returns were approximately 250% over the last decade.

Montier was a keynote speaker at the Inside ETF conference in Hollywood, FL, on January 28. His talk was titled, “Late Cycle Lament.” Here is a link to the slides from his presentation.

As of December 31, 2019, GMO’s seven-year forecast was for real annual returns of -4.9% for large-cap U.S. equities and 8.2% for emerging market equities.

Montier said that one of the most common behavioral biases is over optimism, and it is, “pervasive and dangerous” late in the business cycle. It causes investors to overestimate returns and underestimate risk. He warned that investors are doing just that by allocating toward U.S. equities.

He acknowledged that 2019 was a banner year for equities, but was peculiar because growth outperformed value, as it has done for the last decade. The same was the case with U.S. versus non-U.S. and large-cap versus small-cap equities.

“That upended many deeply held investment beliefs,” Montier said.