GMO's glummest forecast

David_Snowball

GMO just released their February 2015 projection of asset class returns over the next 5-7 years. It may be the glummest, if not the grimmest, I've seen. At this point, they project negative real returns for nine of the 12 asset groups they track.

(3.5%) Int'l bonds (currency hedged)
(3.4%) US small cap
(2.4%) US large cap
(1.0%) US bonds
(0.5%) TIPs
(0.3%) Cash
(0.2%) Int'l small cap
(0.1%) US high quality
0.0% Int'l large cap
2.6% EM bonds
2.9% EM equity
5.4% Managed timber

Three notes: (1) short-term events can dramatically change these medium-range projections, a 25% correction in April or a 20% upswing through June would each make big differences in these numbers, (2) they assume 2.2% long-term inflation so 2.2% nominal is 0.0% real. (2) their method uses a fairly simple regression to the mean for two factors: profits and prices. That is, they assume that aggregate corporate profitability in the future will be about equal to aggregate corporate profitability in the past and that investors in the future are willing to pay about as much for $1 of profits (earnings) as investors in the past did.

If you assume that things are different this time (because of the internet, the Chinese, emerging markets consumers, fracking or benign uses of financial engineering) and that we're reached a "permanently high plateau" in corporate profitability and investor comfort, then their projections would obviously be reduced to readings from a Ouija board.

It does, I think, feed the ongoing discussions here about the future of 60/40 portfolios as safe havens and how to think about positioning your portfolio.

For what interest it holds,

David

rjb112

For those who prefer the visual:

bee

@ David_Snowball
"It does, I think, feed the ongoing discussions here about the future of 60/40 portfolios as safe havens and how to think about positioning your portfolio."

My thought:
How about an "Emerging 60/40 fund"? Would MAPIX or MACSX fit the bill or a maybe a combination of PRMSX and PREMX?

davidrmoran

Whoa, I am gonna get out of all indexed holdings, go to active only, plus emerging only. I just know that will prove better by 2022, so I can laugh at all diversified and balanced chumps.

finder

This plot does not show the standard deviation. For example, if EM will grow 2.9% per year during 7 years, one will get approximately 20%, in average. But what if the average gain of 20% means (approximately) that one may either lose 50% or gain 90% ? (These estimates are a gross simplification of what may happen.) For many of us this would be a very dangerous game to play. Previously they were giving the standard deviation in their predictions, but they no longer do it now.

heezsafe

@davidrmoran What--- no timber?! If one is to be a true believer, one cannot be pickin'-and-choosin' scripture.

AndyJ

Hey, no worries. A nice 50% "correction," and those projections will improve a lot!