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.
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%.
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.
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.
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.
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.
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.
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.”