GMO just released their February 2015 projection of asset class returns over the next 5-7 years. It may be the glummest, if not the grimmest, I've seen. At this point, they project negative real returns for nine of the 12 asset groups they track.
(3.5%) Int'l bonds (currency hedged)
(3.4%) US small cap
(2.4%) US large cap
(1.0%) US bonds
(0.5%) TIPs
(0.3%) Cash
(0.2%) Int'l small cap
(0.1%) US high quality
0.0% Int'l large cap
2.6% EM bonds
2.9% EM equity
5.4% Managed timber
Three notes: (1) short-term events can dramatically change these medium-range projections, a 25% correction in April or a 20% upswing through June would each make big differences in these numbers, (2) they assume 2.2% long-term inflation so 2.2% nominal is 0.0% real. (2) their method uses a fairly simple regression to the mean for two factors: profits and prices. That is, they assume that aggregate corporate profitability in the future will be about equal to aggregate corporate profitability in the past and that investors in the future are willing to pay about as much for $1 of profits (earnings) as investors in the past did.
If you assume that things are different this time (because of the internet, the Chinese, emerging markets consumers, fracking or benign uses of financial engineering) and that we're reached a "permanently high plateau" in corporate profitability and investor comfort, then their projections would obviously be reduced to readings from a Ouija board.
It does, I think, feed the ongoing discussions here about the future of 60/40 portfolios as safe havens and how to think about positioning your portfolio.
For what interest it holds,
David
Comments
"It does, I think, feed the ongoing discussions here about the future of 60/40 portfolios as safe havens and how to think about positioning your portfolio."
My thought:
How about an "Emerging 60/40 fund"? Would MAPIX or MACSX fit the bill or a maybe a combination of PRMSX and PREMX?