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.
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.
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.
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.