GMO Quarterly

Just a thought, but with a few exceptions, there are not that many who are seriously questioning valuations relative to future potential growth rates.  But think about it, why would you create a rod for your own back?  If your job is to invest, then you may not wish to be hamstrung by valuation dilemmas.  Claim markets are overvalued and you have to do something about it.   I tend to be in the rod for your own back side of the room, but I can see an argument for claiming valuations are good, albeit one that has nothing to do with value.

Excerpts from the GMO Quarterly Letter:

as value managers listening for any assets, anywhere, that are screaming to be bought, the world currently sounds a deathly quiet place.

The hoarse whisper of “buy me” coming from European and emerging equities (as well as the polite cough for attention coming from U.S. high quality stocks) comes through loud and clear. For the purpose of doing the right thing by our clients, our major worry today is about whether our straining ears are hearing the whispers of the least overvalued equities as louder than they really are and that we consequently own more of them than is warranted. The “risk” that the U.S. stock market is significantly more attractive than we estimate it to be strikes us, by contrast, as a low probability, as well as one that is exceedingly unlikely to hurt our clients’ portfolios.

….the U.S. stock market is trading at levels that do not seem capable of supporting the type of returns that investors have gotten used to receiving from equities…..there are a couple of ways we could be wrong…

The pleasant way we could be wrong is if the U.S. is about to embark on a golden age of corporate investment and economic growth that will gradually compete down the current return on capital such that overall profits manage to grow decently as the P/E of the stock market wafts slowly down…..but there is sadly no evidence whatsoever that it is occurring,

The less pleasant way we could be wrong is if 5.7% real is no longer a reasonable guess at an equilibrium return for U.S. equities. If equity returns for the next hundred years were only going to be 3.5% real or so…………..We would be wrong about how overvalued the U.S. stock market is, but every pension fund, foundation, and endowment – not to mention every individual saving for retirement – would be in dire straits,………

Leave a Reply