GMO 7 Year Asset Class Forecast (Q3 2011)

GMO has just released its monthly 7-year Asset Class Forecasts and here are the expected annualized return (based on valuation and historical earning growth):

• US Large caps: 3.1% per year
• US Small caps: 1.5% per year
• US High Quality: 6.6% per year
• International Large caps: 7.2% per year
• International Small caps: 6.0% per year
• Emerging Markets: 7.2% per year

Different kinds of bonds are expected to return between -2.7% and 1.9% per year.
Managed Timber is expected to return 6% per year.
Those are real returns adjusted for inflation of 2.5% per year.

So the best performing assets should be international large caps (Europe & Japan?) and emerging markets and the worst performing assets should be US and international bonds.

One way to act on this forecast via ETF would be to buy iShares MSCI Japan Index Fund(EWJ), iShares S&P Europe 350 Index Fund (IEV) and iShares MSCI BRIC Index (BKF) on the long side, and buy short ETF for bonds such as ProShares Short 20+ Year Treasuries (TBF). If you can short, you could do so with SPDR Barclays Capital International Treasury Bonds (BWX).

You can receive GMO's forecasts (monthly) and the quarterly newsletter for free by registering at http://www.gmo.com