2Q 2020 GMO Quarterly Letter
In a new quarterly letter to GMO cl
Sovereign Contingent Bonds: How Emerging Countries Might Prepay for Debt Relief
Emerging countries have been in the midst of a crisis that is not of their own making. A great majority of these countries are navigating the crisis fairly well.
GMO 7-Year Asset Class Forecast: Emerging Market Value Stocks Remain a Standout
The GMO Asset Allocation Team has released its latest 7-Year Asset Class Forecast through July 2020.
Reasons (Not) to Be Cheerful
Never before have I seen a market so highly valued in the face of overwhelming uncertainty. Yet today the U.S. stock market stands at nosebleed-inducing levels of multiple, whilst the fundamentals seem more uncertain than ever before. It appears as though the U.S. stock market has drunk from Dr. Pangloss’ Kool-Aid – where everything is for the best in the best of all possible worlds.
Five Reasons EM Are More Resilient Than in the Past
In a new white paper, the GMO Emerging Markets Equity Team argues that Emerging Markets in aggregate are more resilient today than in prior periods, an important consideration as investors evaluate the rebound the asset class has experienced since late March.
No Need to Bank on a Rebound
The pandemic has created an extraordinary risk/return trade-off for the shares of high quality U.S. banks. We believe there is the potential for decent returns for bank investors without improvement in the current environment, and the potential for enormous returns if the rate of change in the economy remains positive.
1Q 2020 GMO Quarterly Letter
In a new quarterly letter to GMO clients, Ben Inker, head of asset allocation discusses the current uncertainty over the market and economic outlook and the decision to significantly reduce net equity exposure in the GMO Benchmark-Free Asset Allocation Strategy. Alongside Inker’s letter, Jeremy Grantham writes in “The Virus, The Economy and The Market” ...
Introducing ‘Stressed Performing Credit'
In a new white paper, GMO Credit Opportunities Strategy co-PM Jeff Friedman looks at the Federal Reserve’s unprecedented actions in the corporate credit market amid the COVID-19 pandemic and highlights an area of the market where investors might capture attractive opportunities.
GMO 7-Year Asset Class Forecast: 1Q 2020
The GMO Asset Allocation team has released its latest 7-Year Asset Class Real Return Forecasts through the first quarter of 2020.
COVID-19 – Risk and Resilience in EM
In a new white paper from GMO’s Emerging Markets Equity Team, Amit Bhartia, Tiger Tong and Uday Tharar examine
It's Always Darkest Before the Dawn
In a new white paper from GMO’s Asset Allocation team -- "It's Always Darkest Before the Dawn" -- Ben Inker, Catherine LeGraw, John Pease and John Thorndike examine the three phases of bear markets against the backdrop of the current market environment.
Shelter In Credit
Jon Roiter reflects on a wild ride in the high-yield credit market and whether now is the time to capitalize on attractive investments in the space.
Fear And The Psychology Of Bear Markets
While it is, of course, a cliché to say that markets are driven by fear and greed, like many clichés this one contains a strong element of truth. The bad news for us humans is that within our brains, emotion appears to have primacy over cognitive function. While this may well have kept us alive and allowed our species to thrive, this uncomplicated hierarchy doesn’t necessarily work in our favour when it comes to thinking about financial markets.
An Update on the Current Environment Amid COVID-19
GMO’s Ben Inker discusses the recent turmoil in financial markets and the firm’s perspective on valuations amid the sharp declines in many asset classes.
Memo to the Investment Committee: Dare to Be Different
The conventional 60/40 portfolio of today is not going to generate the kind of returns that investors say they need. Investors must seek to embrace the terrifying concept of being different. As the ghosts of many great investors past have amply demonstrated, being different is the path to investment success. However, such advice falls into the simple but not easy category, to borrow Warren Buffett’s expression.
60/40 Portfolios Face Double Trouble Ahead
While the passive balanced portfolio (60% stock/40% bond) has outperformed more diversified allocations over the last decade, we believe investors should temper their expectations for a repeat. Two key problems lie ahead for such a portfolio.
GMO 7-Year Asset Class Forecast January 2020
Our forecasts for stocks generally improved in January as stocks declined, but they fell for bonds as rates rallied. Coronavirus and growth fears weighed on markets, pushing Value and non-U.S. stocks down most.
Chemical Toxicity And The Baby Bust
In today’s society people are choosing to have fewer children, and delaying having children at all into later, less fertile years. These two factors have driven fertility rates below replacement level in most of the world, but a crucial third factor gets little attention and is having a profound impact on fertility: toxicity. The economic and social ramifications will be severe.
How Higher Ratings Are Changing Emerging Debt
By moving our USD emerging debt strategy benchmark to the diversified (issuer-capped) version of J.P. Morgan’s EMBIG benchmark, we will limit our exposure to the ballooning issuance of low-return-potential, opaque countries. Our objective is to retain the “high dividend sovereign equity” nature of this asset class for our investors...
GMO 7-Year Asset Class Forecasts: An Amazing Capstone To A Risk-On Year
The GMO Asset Allocation team has released its latest 7-Year Asset Class Real Return Forecasts
7 Year Asset Class Real Return Forecasts
Emerging market value stocks are the most attractive asset class for two reasons, explains GMO's John Thorndike.
Health Insurance Companies: Rhetoric vs. Reality
The policy proposal of "Medicare for All" calls for nationalizing the U.S. health insurance system. While this is a politically unlikely outcome, the stock prices of the private sector Managed Care insurance companies have suffered as rhetoric heats up.
Climbing the ESG Learning Curve in Emerging Markets
ESG integration is best used as a tool to improve portfolio returns and/or reduce risk. While usually thought of as a company-level concern, material ESG data can be very useful at the country level as well, especially in emerging markets. ESG signals are only as good as the quality of their inputs.
Emerging Market Stocks: Getting Comfortable with the Uncomfortable
In a new GMO Insights piece titled “Emerging Market Stocks: Getting Comfortable with the Uncomfortable,” asset allocation team member Rick Friedman looks at how lackluster emerging market equity returns in recent years have led many investors to write off the asset class, but GMO “humbly suggest(s) investors get more comfortable owning the uncomfortable.”
Shades of 2000
The years leading up to the 2000 stock market bubble were extraordinary and unprecedented. They caused unique pain to the portfolios of valuation-driven investors. The valuation extremes, though, created the greatest opportunity set for valuation-driven investors since the Great Depression.
Bigger's Been Better
Ben Inker highlights the multiple benefits large U.S. companies enjoy when compared with smaller ones, and examines whether the conditions that have caused this situation will remain in place.
GMO’s 7-Year Asset Class Forecasts: Higher Prices and Lower Rates Dim 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 from GMO’s Asset Allocation team.
Risk and Premium - A Tale of Value
Investors who have watched the U.S. stock market over the last decade might be wondering whether the appeal of value stocks has been whittled away by a long run of underperformance.
EM Illiquid Is Not the Same as EM Small Cap - And That’s a Good Thing!
Small cap stocks within emerging markets have outperformed large cap stocks by around 0.5% annualized since January 2000,” George writes. “However, illiquid stocks (regardless of capitalization) have outperformed large cap stocks by around 3%. This illiquidity premium is related to, but not the same as, the small cap premium.
Gaming out Sovereign Default When China Is a Major Creditor
Game theory is a useful framework for modeling aspects of sovereign debt recoveries, given that it models the interactions among debtors and creditors in the lending/borrowing "game." While there is a long-established set of precedents for Paris Club (U.S. & European) and multilateral (IMF, etc) creditors’ actions, we still have little available information about how China will act in debt negotiations.
Alphabet and the DOJ
Shares in Alphabet have come under a good deal of pressure over the last year as investors process the implications of increasing regulatory scrutiny, culminating in reports this month that the U.S. Department of Justice (DOJ) is preparing for an antitrust probe into big tech.
7-Year Asset Class Real Return Forecasts
We continue to favor emerging markets equities, particularly emerging market value, and see some appeal in international value stocks. In the U.S., small-cap value is a pocket that has become quite attractive to us.
Value Investing - Bruised by 1000 Cuts
The duration and magnitude of value’s recent underperformance has caused many to ask once again if value investing is no longer effective. While it is possible that secular shifts have helped to compress value’s premium relative to its long-term history, we believe most of the recent decline can be traced to more transitory factors.
Stop Worrying about Your Portfolio
Investors have a tendency to obsess about their investment portfolios. On the surface, this is a perfectly reasonable focus given results in the portfolio are a crucial determinant of success for whatever purpose the portfolio is there to serve.
7-Year Asset Class Forecasts: Outlook Muted After Strong First Quarter
Our forecasts have come down due to the extraordinary performance of equities and credit in the first quarter. However, we continue to find pockets of opportunity across equities: we believe value stocks are trading at attractive levels globally, and emerging markets value stocks are priced to deliver more than 7% above inflation.
Thinking Outside the Box
Lucas White and Jeremy Grantham examine the benefits of investing in a climate change strategy, including diversification, protection from climate risk, inflation protection and the ability to invest in growth-oriented companies at a discount.
Why Does Everyone Hate MMT?
In a new Viewpoints piece on GMO's website, James Montier examines Modern Monetary Theory (MMT) and the negative view on it taken by many highly-regarded economists.
Closing the Gulf: How the GCC Countries Fit into our Emerging Debt Investment Process
On January 31, 2019, J.P. Morgan, which manages the EMBI suite of emerging market bond indices, added five new countries of the Gulf Cooperation Council (GCC)1 to the external debt benchmarks. This addition represents the largest ever one-time adjustment to the index that our foreign currency sovereign debt funds have historically used as a benchmark.
Total Factor Productivity Growth = Totally Ficiticious Pretentious Garbage
In a new white paper on GMO’s website -- “Total Factor Productivity Growth = Totally Fictitious Pretentious Garbage” -- James Montier and Philip Pilkington take aim at the argument that stagnating incomes are to be blamed on poor productivity growth.
GMO Quarterly Letter
In a new quarterly letter to GMO’s clients, head of asset allocation Ben Inker looks back on a confounding 2018 and discusses how to assemble a portfolio of attractive assets looking ahead.
Is the U.S. Stock Market Bubble Bursting? A New Model Suggests “Yes”
GMO's Martin Tarlie argues in a new white paper that the U.S. stock market was a bubble from early 2017 through much of 2018, and that the bubble started to deflate in Q4 2018, despite strong fundamentals.
7-Year Asset Class Forecasts Increase After Steep Market Declines
Steep declines across most asset classes in the second half of 2018 resulted in significant increases in forward-looking returns.
Crisis and Opportunity in Emerging Debt
Periodic bouts of volatility are a fact of life for emerging market investors, but for those who can ride out such periods of real or perceived crisis, dollar-denominated EM sovereign debt can offer compelling returns.
Quality Equities: The Solution to Today’s Equity Conundrum
Ten years into a bull market, the conventional wisdom is that U.S. stocks are richly valued based on most well-cited metrics. Fortunately, solid investment opportunities remain in places that some value investors may find surprising. This is why the GMO Quality Strategy remains fully invested in equities. We invest globally, yet the portfolio holds primarily U.S. domiciled companies.
The Late Cycle Lament: The Dual Economy, Minsky Moments, and Other Concerns
Overoptimism and overconfidence are two well-known psychological traits of our species. They are particularly dangerous in the late stages of an economic cycle where these terrible twins result in investors overestimating return and underestimating risk – a potentially lethal combination of errors.
GMO's 7-Year Asset Class Forecasts Still Favor Emerging Markets Over U.S. Stocks
Our forecasts continue to favor emerging markets in both the equity and credit markets, says GMO Asset Allocation team member John Thorndike. As of the end of September, the spread between our forecasts for emerging markets equities and large cap U.S. stocks was nearly 8.5%. You have to go back to 2003 to find a wider spread in favor of EM.
Emerging Corporate Debt Fundamentals - How High Is The Risk?
State-owned enterprises (SOEs) account for much of the emerging market corporate debt universe, and with fundamentals weak relative to history, there are concerns about the impact of rising rates on these corporations. In a new GMO Emerging Debt Insights, Mustafa Ulukan explores these concerns.
The Race of Our Lives Revisited
In a new white paper on GMO’s website, Jeremy Grantham updates his discussion of the threats posed by climate change, population growth and increasing environmental toxicity, and his perspective on the role investors can play in combating these threats. In “The Race of Our Lives Revisited” Grantham summarizes the current state of affairs and the likely impact on the future ability to feed the 11 billion people projected to live on Earth by 2100.
Emerging Markets—No Reward Without Risk
Emerging equities are more volatile than developed market equities. This owes little to the volatility of emerging stock markets in local terms and much more to the strong positive correlation between their local stock markets and movements in their currencies. The spring of 2018 was a classic example of this, with US dollar strength driving significant emerging weakness.
Multi-Asset Class Strategies: How Do I Use Thee? Let Me Count The Ways.
Not too long ago, investors, consultants, and advisors in the asset management field struggled with the role of Multi-Asset Class (MAC) strategies. They were perceived as misfits, given their cross-asset mandate and their dynamic nature. Today, however, they are utilized and embraced in all sorts of different settings.
Emerging Debt in a Rising Interest Rate Environment
"A rising global interest rate environment is once again leading to volatility in the emerging debt markets,” writes GMO’s Carl Ross in a newly-published Emerging Debt Insights piece. As the US 10-year Treasury has risen to the 3% neighborhood, benchmarks of emerging country bonds, both in hard currency and local currency, have fallen.
Is Investing Starting to Get Difficult Again?
In a new quarterly letter to GMO's institutional clients, head of asset allocation Ben Inker reflects on a change in the investment environment in the first quarter, characterized by a rise in volatility and a significant shift in the correlation between stock returns and bond returns ("Is Investing Starting to Get Difficult Again? I Hope So").
GMO's 7-Year Asset Class Forecasts Still Favor Non-US Markets
Most global equity markets declined in the first quarter despite the corporate sector generally reporting reasonable fundamental data. As a result, GMO's 7-year equity forecasts mostly improved over the first quarter. Even with these improvements, International and U.S. equities are still forecast to have flat to negative real returns over the next 7 years, with Emerging equities remaining an exception, forecast to have a positive real return of 1.9%.
Russia: A Riddle, Wrapped in a Mystery, Inside an Enigma
In the latest GMO Emerging Equity Insights, Arjun Divecha, head of GMO's Emerging Markets Equity team and a member of the GMO Board of Directors, shares his thoughts on the recent selloff in Russian equities.
Go West, Young Investor…But Go Wisely: Intelligent Investing in an Unintelligent Landscape
Investing requires bearing risk to reap rewards, but there is no definitive causal relationship here. Just because you might be willing to pack up your wagon and head off into the sunset doesn’t ensure you’ll be rewarded with wealth. Today investors should be particularly diligent in assessing risk before setting off on any journey.
ESG: Improving Your Risk-Adjusted Returns in Emerging Markets
Emerging market economies are more vulnerable to the ill effects of ESG issues, but because transparency into such issues in these regions has been lacking, and because investors may have different understanding of risks and opportunities than ESG ratings agencies, integration has been difficult," the white paper says.
Contemplating Value in Emerging Markets Intelligently, with a Little Help from Ben Graham
In the latest GMO Emerging Equity Insights, titled “Contemplating Value in Emerging Markets Intelligently, with a Little Help from Ben Graham” Amit Bhartia and Matt Seto revisit Ben Graham’s principles of value investing and extrapolate them to investing in emerging markets.
Trade Wars are Bad, and Nobody Wins
Inker, the head of GMO's asset allocation team, warns that a full-blown trade war "is probably more dangerous for investors at this time than at any other time in recent history."
The Value of Short Volatility Strategies
The authors believe that with today’s heightened valuations across global equity markets, and volatility no longer cheap, now is a fitting time for investors to take a careful look at put writing strategies and consider swapping a portion of their traditional equity exposure for index put-writing. The piece concludes with a “Special Topic” dedicated to examining the recent VIX Blowup.
GMO Quarterly Letter
In a new quarterly letter to GMO's institutional clients, head of asset allocation Ben Inker considers the hypothetical question posed by chief investment strategist Jeremy Grantham in his third-quarter 2017 letter, "What should you do if you are tasked with managing Stalin's pension portfolio?" ("Don't Act Like Stalin! But maybe hire portfolio managers that do?").
The Advent of a Cynical Bubble
James Montier, a member of GMO’s Asset Allocation team, has just published a new white paper -- "The Advent of a Cynical Bubble” – examining the nature of the bubble we find ourselves in, noting the concept that “the US equity market is obscenely overvalued can hardly be news to anyone.”
7-Year Asset Class Forecasts
The GMO Asset Allocation team has released its latest 7-Year Asset Class Forecasts, which show emerging market equities are likely to generate the best real returns over the next seven years, though investors should temper their expectations for those returns.
Bracing Yourself for a Possible Near-Term Melt-Up
In the latest GMO Viewpoints -- "Bracing Yourself for a Possible Near-Term Melt-Up" -- Jeremy Grantham has a warning for bubble watchers: the next phase in this long-running bull market may be even more dizzying gains. Among the factors Grantham considers are the acceleration of price, increasing concentration like that in tech "winners," outperforming quality and low beta stocks and the role of the Fed in recent bubbles.
GMO Quarterly Letter
In a new quarterly letter to GMO's institutional clients, head of asset allocation Ben Inker discusses why investors should be thinking about the risks of surging inflation, even if such a surge may not be inevitable or even probable. Chief investment strategist Jeremy Grantham considers the current market environment and how to most rationally take risk with the ultimate stakes on the line.
FAANG SCHMAANG: Don’t Blame the Over-valuation of the S&P Solely on Information Technology
A small group of technology stocks have recently delivered stellar returns. Facebook, Apple, Amazon, Netflix, and Alphabet (Google), the so-called “FAANG” stocks, are up 36% on average year to date through September. This superlative performance, in such a narrow group of large cap names, has led many to raise questions about the current valuation of the S&P 500, its sector composition, and comparisons to other markets.
China’s Rising Presence in Emerging Debt Markets
Countless articles have been written in the past 10 years predicting (or warning) of China’s imminent financial demise, with the number of articles accelerating in recent years amid China’s debt build-up in the post Global Financial Crisis period. Investing on the basis of a “China collapse” view of the world would likely have resulted in more risk-averse portfolios in the emerging debt space and, hence, lower returns in recent years.
The Good Thing About Climate Change: Opportunities
In a new white paper, “The Good Thing About Climate Change: Opportunities,” GMO’s Lucas White and Jeremy Grantham discuss the growing problem of climate change, the exciting investment possibilities in companies combating that peril and the best ways for investors to approach the opportunity.
The S&P 500: Just Say No
James Montier and Matt Kadnar, members of GMO’s Asset Allocation team, have just published a new white paper -- “The S&P 500: Just Say No” -- warning of the risks to investors throwing in the towel on valuation, diversification and active management in favor of a passive allocation to large-cap U.S. equities.
Merger Arb and Unicorns
Imagine an asset class with a decently positive expected rate of return, little to no equity beta, and little to no interest rate duration. A unicorn? We think not.
Emerging Value and Margin of Superiority by Ben Inker and Why Are Stock Market Prices So High? by Jeremy Grantham
Revisiting the Traditional Emerging Market Equities Allocation Framework
Bhartia, a portfolio manager on GMO’s Emerging Markets Equities team, and his colleague Mehak Dua, explore the benefits of combining a risk-based approach with valuation in an asset class that has grown considerably more complex over the last three decades.
I Do Indeed Believe the US Market Will Revert Toward Its Old Means – Just Very Slowly
Jeremy Grantham explains why he believes that the high equity prices in today’s market have some staying power, and expects it will take much longer than usual for the power of mean reversion to draw profit margins and price earnings ratios back to historical norms.
Whiplash: On Value, Growth, and Ignoring the Fundamentals
After a decade of lagging relative returns, value equities delivered impressive performance in 2016, outperforming growth stocks by 10% in the US.
Qatar: A Test Case for the “America First” Doctrine?
Saudi Arabia and the United Arab Emirates effectively excommunicated Qatar from the Gulf Cooperation Council (GCC); they cut off all transportation links, forced Qatari citizens in the GCC to leave, and closed their airspace to Qatar Airlines’ flights to Europe and the US. The stated goal of these measures is to force the Qatari government to stop allying with the government of Iran and to stop supporting certain political/terrorist groups, like the Muslim Brotherhood, in Egypt and across the Middle East. However, if the Qataris do not accede to their demands, their objective may become to cause regime change in Qatar. The US has a major military base in Qatar and so has a stake in the outcome.
America Is Great. Home Country Bias Ain’t.
Investors have a tendency to prefer home cooking when it comes to their stock portfolios. In the latest GMO Asset Allocation Insights, Rick Friedman writes that US-based investors are paying steep prices for domestic equities. but straying from their home market presents more attractive prices.
GMO Quarterly Letter
In a new quarterly letter to GMO's institutional clients, head of asset allocation Ben Inker addresses "perhaps the most common question I get from clients: What keeps you up at night?" ("Up At Night").
The Reserve, Part II The US Dollar: Still the Cleanest Dirty Shirt?
Is the dollar losing its grip on its status as the world’s reserve currency?
For Whom the Bond Tolls: Low Rate Beneficiaries in a Rising Rate Environment
Sluggish growth and aggressive central bank actions following the Global Financial Crisis pushed interest rates down to unprecedented levels, even negative outside the US, for longer than many would have expected.
What are the Risks and Opportunities?
Amar Reganti, a member of GMO’s Asset Allocation team, examines “ultralong” debt in his new white paper “The 100 Year: A Take on the Century Bond.” The recently confirmed Secretary of Treasury, Steven Mnuchin, has indicated that he would "possibly review the issuance of a 100-year bond as an instrument used to achieve that maturity extension."
The Deep Causes of Secular Stagnation and the Rise of Populism
In a companion paper, “Six Impossible Things Before Breakfast,” we present evidence that asset markets are generally priced for “secular stagnation,” and argue that this requires a number of extreme assumptions on the part of investors.
Six Impossible Things Before Breakfast
One of the great joys of working at GMO is the freedom to disagree. Indeed, many moons ago when Ben Inker first approached me about joining GMO, he told me that, having read my work, he believed we were very much philosophically aligned.
Beware The Wu Wei of Passive Bond Investing
Passive “doing-by-not-doing” is no way to run a bond portfolio today.
Emerging Markets Can Trump US Policy Rhetoric
We believe the consensus view of a Trump presidency translating into a blanket “stay clear of ” investing in emerging markets is overly simplistic. Our analysis of President Trump’s proposed policy of trade protectionism suggests that the impact on emerging markets is more nuanced – the vulnerability of these markets is significantly lower today than it was five years ago...
Emerging Markets: Value Trumps Headlines
Some investors are swearing off emerging markets in the age of President Trump. That’s a mistake, says Rick Friedman, a member of GMO’s Asset Allocation team. To these bears, “the double whammy of stimulative US fiscal policies coupled with possible protectionist barriers, makes emerging investments less attractive,” Friedman writes in a new piece “Emerging Markets: Value Trumps Headlines.”
Getting "The Biggest Bang For The Buck" In Target Date Plans
Can target date plans be better? That’s the question many defined contribution plan sponsors are asking and a new paper from GMO’s Peter Chiappinelli and Ram Thirukkonda argues yes, they can.
GMO Quarterly Letter
GMO Quarterly Letter by Ben Inker and Jeremy Grantham
GMO Quarterly Letter
GMO Quarterly Letter from Ben Inker and Jeremy Grantham
The Reserve: The Dollar, the Renminbi, and Status of Reserve
An Investment Only a Mother Could Love: The Case for Natural Resource Equities
Lucas White and chief investment strategist Jeremy Grantham highlight the long-term investment opportunity in natural-resource equities.
The Duration Connection
Immigration and Brexit
In a commentary today, GMO chief investment strategist Jeremy Grantham addresses risks and potential unintended consequences of the U.K.'s Brexit decision.