Jeremy Grantham GMO 7-Year Asset Class Forecast, Q1 2016

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I tend to ignore most market predictions, especially the short-term ones. However, I do keep up with a few longer-term forecasts which seem to offer the best combinations of historical data, logic, and common sense. I definitely don’t assume they are correct, but like learning from their arguments. By saving them here, hopefully I can look back later to see how they end up and learn even more. One of these is the GMO Quarterly letters by Jeremy Grantham and their GMO 7-Year Return Forecasts (free registration may be required).

Here is the most recent GMO 7-Year Asset Class Forecast, as of March 31, 2016:

gmo2016q1_trim

They just released a newer one, but here are my notes on the the previous GMO Quarterly Letter, Q4 2015:

  • They are starting to like high-yield corporate bonds again. “At current spreads, high yield seems to be no worse than fair value and probably better than that, even if we assume (as we do) that we are entering a fourth default cycle. In today’s environment, that makes it one of the best available risk assets for investors.” – Ben Inker.
  • Two areas where the U.S. has “documentable advantages”… 1. Americans are more entrepreneurial and willing to take risks. 2. US and Canada are relatively well-positioned to face future climate and food production challenges due to our natural resources (water, arable land, fossil fuels).
  • The low commodities prices right now will have underestimated positive effects on our economy, but they won’t last forever.
  • “As always, though, prudent investors should ignore historical niceties like these and invest according to GMO’s rather depressing 7-year forecast. The U.S. equity market, although not in bubble territory, is very overpriced (+50% to 60%) and the outlook for fixed income is dismal.” – Jeremy Grantham.
  • “At current asset prices no pension fund requirements can be met. Thus, we should welcome a major market break that will leave us with more reasonable investment growth potential for the longer term, but I suspect that we will have to wait patiently for such a major decline.” – Jeremy Grantham.

My personal opinions and takeaways:

  • Their forecast is certainly depressing. Keep in mind the numbers are inflated-adjusted “real” returns. I am more optimistic long-term, but it is best to be prepared.
  • Enjoy any benefit of low oil prices while they last. Put aside some savings from lower gas and heating oil prices, if you can.
  • Keep your equities diversified internationally. Certainly don’t give up on US stocks but don’t be 100% US either.
  • Even though GMO likes high-yield corporate bonds right now, it is a timing game that I choose not play. I am staying in short- to intermediate-term, high-quality bonds.
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Comments

  1. Brian Ross says:

    Why do they think timber will go up so much? In an increasingly paperless world and also, if the economy is down than building timber is also likely not in demand. Just doesn’t seem to make sense.

  2. Was just looking at this yesterday. I was also reading a recent post by Meb Faber regarding emerging markets I found interesting…
    http://mebfaber.com/2016/04/21/50-returns-coming-commodities-emerging-markets/

  3. More interesting than their current forecast would be an analysis of how well their 7-year forecast from 2009 matched reality. I see a June 2010 forecast (https://www.mymoneyblog.com/granthamgmo-7-year-asset-class-forecast.html) but nothing on this site from 2009.

    • You can definitely find GMO forecasts from 2009 out there, but is there a publicly-available way to see 7-year historical total returns by asset class? I think you could tweak some Morningstar data to do it, but perhaps someone in finance has access to a better database.

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