A few of the key takeaways provided by Morningstar's Ryan Leggio from his notes at a talk given by Grantham and Ben Inker, head of risk at GMO, to investment professionals last Wednesday:
Pension plans assume they can achieve an 8% nominal return with a 60/40 portfolio. Since bonds yield about 4%, this means they assume equities can return about 11% annualized going forward from today's valuations. By contrast, GMO thinks equities will return about 6%. With these assumptions, a 60/40 portfolio is more likely to return about 5% annually.
GMO thinks most equity categories are overvalued. This is because it forecasts the S&P's profit margin will return to its 6% historical level rather than rise to the 7%-plus level analysts are forecasting.
High-quality stocks are a free lunch in GMO's opinion. Since 1965 they have beat the S&P 500, but they should have a lower equity risk premium because they are better companies with better balance sheets than the average S&P 500 company.
Quality stocks are the cheapest they have ever been on a relative basis since 1965 compared to the S&P 500. The last time they came close to this level was in 2000 (tech bubble) and 1969 (right before Nifty-Fifty era).
Thanks Ryan!
Blog Note: Grantham said in his latest Quarterly Letter that a "run to the old highs" was possible. The crisis in Europe and the return of risk and fear in the markets seems to have tempered such optimism.
No comments:
Post a Comment