GMO Quarterly Letter: Speculation and Investment
Speculative booms provide both entertainment and outsized profits while they are happening, but they do generally burst painfully,” Inker writes. “Speculative booms provide both entertainment and outsized profits while they are happening, but they do generally burst painfully. This is particularly true in equity markets, where the demand growth is ordinarily met with increased supply from savvy capitalists. Maintaining excess demand in the face of growing supply becomes ever more difficult and eventually proves impossible.
The Duration of Value And Growth
It is commonly assumed that growth stocks are bigger beneficiaries of falling interest rates than value stocks, an assumption driven by a belief that growth stocks are much longer “duration” than value stocks due to the fact that more value in growth companies comes from relatively more distant cash flows.
Japan Value: An Island of Potential In A Sea of Expensive Assets
Global stocks and bonds are both expensive. U.S. stocks are trading at particularly elevated valuations with the CAPE ratio standing at 35x (vs. a 10-year average of less than 27x) while the Barclays Bloomberg U.S. Aggregate index offered a negative real yield at the end of February.
A Spac-Tacular Distraction
In a new piece from the GMO Event-Driven Team, Doug Francis and Sam Klar discuss the growing supply-demand imbalance in the asset class that has driven focus towards the SPAC boom and away from the opportunity in other investments like merger arbitrage.
Waiting for the Last Dance
Featuring extreme overvaluation, explosive price increases, frenzied issuance, and hysterically speculative investor behavior, I believe this [bull market] event will be recorded as one of the great bubbles of financial history, right along with the South Sea bubble, 1929, and 2000.
GMO 7-Year Asset Class Forecast: November 2020
While real return forecasts for broader markets are not particularly promising, there are some pockets that look more attractive than others. As GMO put it in the firm's recent Quarterly Letter, "Value is cheap, no matter where you look."
Tonight, We Leave the Party Like It’s 1999
History does not repeat, but it rhymes, as Mark Twain observed. As such, we are struck by the eerie and dangerous parallels between today’s markets and the markets back in 1999. Back then, Value investing and Value managers were under the gun for having underperformed their Growth brethren for too long.
Covid-19, Climate Change, and the Need for a New Marshall Plan
In a new piece – “Covid-19, Climate Change, And The Need For A New Marshall Plan” – GMO’s Jeremy Grantham discusses the impact of Covid-19 on the economy of the developed world, arguing great strides are necessary in order for the U.S. and the world to accelerate growth.
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.
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.
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.
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.
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...
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.
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.
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.