GMO 7-Year Asset Class Forecasts - 4Q 2011

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: 1.4% per year
• US Small caps: -0.5% per year
• US High Quality: 5.3% per year
• International Large caps: 6.12% per year
• International Small caps: 5.0% per year
• Emerging Markets: 6.8% per year

Different kinds of bonds are expected to return between -2.5% and 1.2% per year.
Managed Timber is expected to return 6% per year as always in GMO forecats.
Those are real returns adjusted for inflation of 2.5% per year.

The expected returns have slightly decreased since last quarter, but the best performing assets remain international large caps (Europe & Japan?) and emerging markets 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 -0.5% and 1.4% per year.

The ways to act on this forecast remain the same as last time, e.g.  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). 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 http://www.gmo.com