Friday, February 10, 2012

Jeremy Grantham Q4 2011 Australasia Update Summary

Jeremy Grantham, GMO, has just released a long 54-page update.

First there are several tables showing the 2011 performance of GMO's Trusts that seem to cover virtually all markets around the world.

He reviews the Australian market for Q4 2011 (lower interest rates, market slightly up...) and gave GMO's outlook  that is the potential for the Australian market to rally further thanks to low valuations (PE: 10) and despite global growth worries and earning downgrades.

After that, he gave his reviews of the global markets (European market and Emerging market weak due to the EU debt crisis while US markets outperformed as the US is seen less risky by investors) and provided GMO allocation strategy:
  • Maintain Quality bias. Quality gave back a bit of its outperformance this quarter, but the game is in the early innings still. High quality stocks still trade at attractive levels, and the general defensive posture of quality still remains appealing given all of the uncertainties surrounding global prospects,
    dysfunctional governments, and horrific bond yields. 
  • Bias toward Value in EAFE (Europe, Australia, Far East). We’ve also begun to bias our international portfolios toward Value. One cannot characterize this as a “big bet,” but valuations are such that we are beginning to see attractive spreads between Growth and Value in international equities.
  • Reduce exposure slightly to emerging markets. We funded some of the flows into EAFE both
    through cash proxies and from Emerging equities. Continued concern surrounding China’s economic
    bubble and a likely inability to deflate it without contagion effects gave us pause.
  • Continued bearishness on bonds. We are literally running out of superlatives to describe how much we hate bonds. Yields are pitiful, dangers of even a slight recovery that could wreak havoc for long-duration portfolios loom, and monetary policies globally certainly have added to the specter of rising yields. 
  • Invest in conservative absolute return strategies, where available. Ideally, absolute return strategies are often a pure play on manager skill. Therefore, the return streams should have little correlation to the movements of the markets. Such investment instruments can provide equity-like returns, while helping to diversify other parts of one’s portfolio.
Then he switched to Emerging markets explaining that they underperformed their developed
counterparts in 2011. This was at odds with their relative macroeconomics with emerging economies making a lot more progress than their developed counterparts in regaining their pre-crisis growth trend.

For 2012, with slower growth and lower inflation, emerging market central banks begin the year significantly more open to monetary easing which is one of the reasons they are positive on the asset class this year. The other reason is valuations as after dropping about 20% over the course of the year emerging markets enter 2012 significantly cheaper than their historical averages.

You read the complete report which is available for free on GMO website.

No comments:

Post a Comment