Jeremy Grantham, co-founder of GMO is a well respected analyst who spent a lot of time identifying asset bubbles and warned investors about possible minefields in the asset markets. Grantham is highly respected in the industry and his famous 7 year forecast helped avoid asset bubbles back in 2008 when I was making asset allocation decisions.
The most recent predictions by Grantham suggest US equities and US government bonds are expensive and its 7 year projected return are negative. The GMO 7 year asset return forecast suggest investors should be allocation more into emerging market bonds and emerging market equities.
GMO 7 year asset return forecast can be a useful tool to help investors making asset allocation decision because:
- It cover a wide variety of assets: U.S. Large Cap, U.S.
Small Cap, International Large Cap, International Small Cap, and Emerging
Markets. U.S. government
bonds, International bonds, emerging market bonds, US inflation linked bonds and cash. One can make decision based on the projected returns of different asset class.
- Researchers who follow the 7 year forecast suggest these forecasts are accurate. A university professor from Duke University of Durham (Edward Tower) investigated the accuracy of these forecasts from the period of 2000 to 2010 and concluded the predictions are accurate. According to Durham, the correlation between the projected return of the forecasts and the realized return for all asset classes is 0.828. (If Grantham is god and make perfect projection, the correlation coefficient is 1)
- His predictions are value oriented instead of trend oriented and investors are less likely to buy into hot money making sectors of the past few years that are richly valued. Grantham usually sound the alarm ahead of time and investors who follow his advice might missed out on the later stages of asset price rally.
Here are the comments I highlighted from the latest GMO report:
Graham on US stocks: For me, recognizing the power of the Fed to move assets (although desperately limited power to boost the economy), it seems logical to assume that absent a major international economic accident, the current Fed is bound and determined to continue stimulating asset prices until we once again have a fully-fledged bubble. And we are not there yet. (Graham bubble target: S&P500 will hit 2250 points)
Ben Inker on government bonds: The case for long-term government bonds today as an investment is a very thin one. The case for them as a speculation is perhaps better. (Ben presented investors a few facts --- on how central banks around the world manipulate the markets and push long term bond yields below the rate of expected inflation. Net duration of Ben's multi asset portfolio is zero --- )
Latest quarterly letter from Jeremy Graham
http://www.gmo.com/websitecontent/Quarterly_Letter_complete_1Q15.pdf
Market watch reports on professor Durham's research
http://www.marketwatch.com/story/jeremy-granthams-stock-picking-batting-average-2014-06-09
