Every quarter, the asset manager Grantham, Mayo & van Otterloo (GMO), founded by Jeremy Grantham, produces a graph showing the return forecasts of several asset classes for the next seven years. The current asset class forecast also lives up to Grantham’s reputation as a prophet of doom.
• GMO releases new 7-year forecast for various asset classes
• Negative return predicted for US stocks
• Hit rate of past GMO forecasts low
Jeremy Grantham is known as a particularly pessimistic investor. He has been predicting the bursting of a stock market bubble for a long time and has also drawn attention to himself with other rather gloomy prophecies. Now the asset manager he founded, GMO, where Grantham also sits on the supervisory board, published the latest version of its seven-year asset class forecast. This is a graphic published quarterly that is intended to show how local, real returns – after deducting expected inflation – will develop on average for several asset classes over the next seven years. Unsurprisingly, the forecast paints a pretty bleak picture – for both stocks and bonds.
GMO predicts lean times in the stock and bond markets
The basis for the return forecasts prepared by GMO are “reasonable assumptions from GMO,” as the asset manager states when publishing the chart on “Advisor Perspectives.” For example, it is assumed that US inflation will return to a long-term inflation rate of 2.3 percent over a period of 15 years. This is justified by the principle of “mean reversion” – in German also “mean value return”. This theory also underlies GMO forecasts in general. It states that all markets will eventually revert to a mean or previous trend. A period of exaggeration is followed by a period of correction – and after years of above-average returns on the stock market, quite lean times are expected for the next seven years.
As the GMO chart shows, the long-term U.S. stock return after inflation is 6.5 percent based on historical data. However, according to the asset manager’s forecast, almost all stock markets will remain below this long-term average over the next seven years, and negative returns are even expected for US stocks. The current forecast suggests that large caps from the USA will achieve a negative return of minus 1.8 percent, while US small caps will achieve a negative return of minus 0.7 percent. Globally, GMO also expects only low stock returns and a comparatively better performance of small stocks. For international large caps, the real return in local currency is estimated at 2.7 percent, while international small caps do slightly better in the forecast at 4.7 percent and are on a par with stocks from the emerging markets. According to GMO, the expected return of 6.6 percent is only likely to be close to the historical average for stocks in the emerging markets value sector. According to Jeremy Grantham’s asset manager, they offer the greatest potential over the next seven years.
No higher real returns are expected in the area of bonds either. According to the GMO, the highest returns are on debt from the emerging markets, which, according to the forecast, should offer a real return of 4.9 percent. US bonds, on the other hand, only come to 2.1 percent, international secured bonds only 0.4 percent.
Success rate of GMO predictions rather poor
“Forward-looking statements are subject to numerous assumptions, risks and uncertainties that change over time. Actual results may differ materially from those anticipated in forward-looking statements,” GMO cautions in publishing the Asset Class Return Forecast at Advisor Perspectives “. The “Financial Times” examined how much the actual results have deviated from the GMO forecasts in the past – and came to a clear conclusion.
In its analysis, the business magazine points out, among other things, that numerous diagrams in the seven-year forecast published quarterly would always follow a similar pattern, at least in the equities sector. US stocks are practically always overvalued and doomed to collapse, while things are looking better for securities from the emerging markets and stocks from the emerging markets value sector are “amazing” in terms of the forecast returns. The Financial Times sees this as “perpetual, very GMO-like patterns” and concludes that the asset management company cannot help but “introduce its own value biases into the process.”
However, the reality was completely different in the past. For example, US large caps have performed incredibly well in recent years, even though GMO has been forecasting negative returns for them since at least 2015. Small caps from the USA and internationally have also developed well over the past ten years. The Emerging Markets Value area, for which GMO has been extremely positive for years, was, according to the Financial Times, an “absolute disaster area”. “The actual performance of the most important asset classes [bei den Aktien; Anm. d. Red.] “In the last decade, it was almost exactly the opposite of GMO’s forecasts,” says the business magazine. According to the “Financial Times,” investors were therefore better off doing stock investments in the past by doing exactly the opposite of what the GMO Prognosis suggested.
Editorial team finanzen.net