Thursday, March 15, 2012

GMO 7-Year Asset Class Forecasts - February 2012

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

  • US Large caps: 0.4% per year
  • US Small caps: -1.8% per year
  • US High Quality: 4.4% per year
  • International Large caps: 4.0% per year
  • International Small caps: 3.3% per year
  • Emerging Markets: 5.0% per year

Different kinds of bonds are expected to return between -2.5% and 0.8% per year.
Managed Timber is expected to return 6.5% per year. Those are real returns adjusted for inflation of 2.5% per year.

Those returns look lackluster, and the chart above is as of 29th of February 2012. The different market have generally rallied since then, so the expect returns over 7-year should even be lower today.

Over the next 7 years, the best performing assets are expected to be emerging markets and US high quality stocks and the worst performing assets should be US and international bonds. The US market (except High Quality Stocks) should also be avoided with returns between -1.8% and 0.4% per year.

The ways to act on this forecast is to buy iShares MSCI BRIC Index (BKF) on the long side (I'm not sure how you could get exposure to high quality stocks as defined by GMO), 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). However, the expected returns on the short side, may not warrant taking this risk just yet, especially with the decay inherent to short and leveraged ETFs.

You can receive GMO's forecasts (monthly) and the quarterly newsletter for free by registering at

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