GMO Says Emerging Markets Stocks Will Trounce U.S. Equities

Emerging markets stocks will bury U.S. equities over the next seven years, according to GMO. 

The asset manager has predicted that shares of large U.S. companies will lose 3.7 percent annually over that period, while emerging equities will deliver a 5.2 percent real return on an annual basis. With international equities expected to post relatively small gains, the firm predicted that emerging value stocks will have the strongest annual returns at 9.8 percent.

The forecast stands in stark contrast to the performance this year of U.S. stocks, which have risen to record peaks and produced double-digit returns. Institutional investors’ hunt for yield is bound to intensify over the next several years as gains from equities are predicted to tumble and concerns grow over negative yielding bonds outside the U.S.

“GMO’s seven-year asset class forecasts for both stocks and bonds have generally declined in 2019, predominantly due to strong appreciation in asset prices,” Rick Friedman, a member of the firm’s asset allocation team, said in an emailed statement Thursday. “We continue to favor emerging market value stocks, which are trading cheap relative to our long-term equilibrium assumptions.”

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Pensions are already struggling with funding levels needed to meet their obligations to workers in their retirements. U.S. corporate pensions, for example, were 85.6 percent funded at the end of July, according to Wilshire Associates.

The consulting and investment management firm based its calculations on a portfolio with 40 percent allocated to U.S. and global equities. U.S. stocks represented 24 percent of the assumed portfolio, while stocks outside the country made up 16 percent, a Wilshire statement earlier this month shows.

Pension funding levels have benefited from record performance of the U.S. stock market this year. The S&P 500 index, which a month ago rose to an unprecedented 3,026, has gained about 17 percent through August 21. Over the next seven years, however, GMO has predicted that both large-cap and small-cap U.S. stocks will fall.

Fixed-income returns also appear dismal between now and 2026, according to GMO. The firm has predicted real annual losses for U.S. and international bonds in that period, with emerging debt squeezing out a 0.7 percent real return on an annual basis.

Developing economies are already bright spot for hedge funds. 

Hedge Fund Research’s emerging markets index rose 8.6 percent during the first seven months of 2019, exceeding the 7.8 percent gains posted by its weighted composite index tracking all strategies and regions. Bets in Russia and Eastern Europe have produced the strongest performance this year, with a 15.9 percent return through July.

“Emerging markets hedge funds led industry‐wide gains through mid‐year,” Kenneth Heinz, HFR’s president, said in a statement Thursday.