• Skip to primary navigation
  • Skip to main content
  • Skip to primary sidebar
  • Skip to secondary sidebar
  • Skip to footer
  • Subscribe
  • Twitter
  • RSS Feed

Investment News NZ

Investment News provides financial advisers news stories from the financial industry in New Zealand. Subscribe to our free weekly newsletter.

  • Home
  • News
  • Kiwisaver
  • Subscribe
  • About
  • Advertise
  • Contact
You are here: Home / Investment News / GMO questions US specialness

GMO questions US specialness

December 13, 2015

Ben Inker: GMO head of asset allocation
Ben Inker: GMO head of asset allocation

US equity ‘exceptionalism’ is an over-rated concept, according to a new analysis by Boston-based fund manager, GMO,

In the GMO quarterly newsletter published last week, GMO head of asset allocation, Ben Inker, argues the US stock market hasn’t “proved itself particularly extraordinary” by long-term measures.

Inker says the recent good run of US stocks has been buoyed by higher corporate profitability compared to the rest of the world but investors should treat any claims of ‘specialness’ with caution.

“Certainly there is no strong evidence that would cause us to believe the US is truly deserving of trading at a higher P/E than the rest of the world,” he says in the GMO paper. “On the profitability front, there seems little doubt US corporate profitability is better than normal, but the question is how much better?”

By GMO’s “best estimate” US corporate profit margins are currently about 24 per cent above the long-term norm but Inker says there is a “wider than normal range of possibilities” of between 5-40 per cent above normal.

“The impact on our forecast [US equity returns] is a range as high as +2% real to a disastrous -4% real for the next seven years, depending on which measure of profitability was the ‘true’ one,” the paper says.

Conversely, Inker says investors have unfairly discounted emerging markets as a “value trap” while ignoring long-term fundamental evidence.

“The data on emerging also provides evidence that emerging equities are just equities – neither meaningfully better or worse than those in the developed world over the period for which we have reasonable quality data,” he says.

“Profitability measures all seem to be saying that today’s [emerging market equities] earnings are about normal, suggesting a range around our forecast of +4.6% real of as much as +5.7% and as little as +3.4% – and even the worst of these is better than the best of our range for the S&P 500.”

GMO has forecast a seven-year after-inflation return from US stocks of -0.6 per cent.

In spite of the upbeat expectations for future returns, Inker acknowledges emerging market investors have taken a hammering over the last five years at least.

“Losing to the rest of the world by 14.7% in a year is bad enough, but losing by 12.2% per year for five years is a lot worse,” he says. “A dollar invested in MSCI Emerging has turned into $0.83 over that period, while a dollar invested in MSCI EAFE has grown to $1.21 and a dollar in the S&P 500 to $1.87.”

Inker says while the ongoing poor performance has prompted many investors to step back from emerging markets, others were asking whether “holding non-US stocks is at all necessary”.

“As market historians we can say that the timing of such sentiments tends to be bad – no one seems to ever decide to give up on an asset class after it has just had good performance, and the last burst of ‘why bother with non-US stocks’ occurred just before the top for the S&P 500 in 2000,” he says.

However, Inker stands by the GMO analysis that points to brighter times for emerging markets.

“None of this is to say that emerging doesn’t have its share of problems or that the US may not pull a rabbit out of its hat, but we do not currently see any reason to assume the worst from emerging or the best for the US,” he says.

The GMO newsletter also includes a statistical rebuttal by the firm’s founder, Jeremy Grantham of various US superiority myths.

Grantham argues the US has performed poorly in the global context across a range of metrics including income growth, unemployment, health care, education, foreign aid and even democratic representation.

He says the US predilection for ‘good news’ has lowered the quality of public debate.

“We are ready to be manipulated by vested interests in finance, economics, and climate change, whose interests might be better served by our believing optimistic stuff ‘that just ain’t so’,” Grantham says. “We are dealing today with important issues, one so important that it may affect the long-term viability of our global society and perhaps our species. It may well be necessary to our survival that we become more realistic, more willing to process the unpleasant, and, above all, less easily manipulated through our need for good news.”

Print Friendly, PDF & Email
Twitter0
LinkedIn0
Google+0
Facebook0

Read More » Investment News

Recent articles

  • KiwiWRAP lays down investment backing tracks January 24, 2021
  • Government to set eyes on PIEs as tax hike bites January 24, 2021
  • Venture fund hires short-term chief, refits board January 24, 2021
  • MJW finds KiwiSaver manager choice matters more at riskier end… January 24, 2021
  • … as weight gain spread among mid-level schemes January 24, 2021
  • NZX admin unit confirms old client for new platform January 24, 2021
  • NZ Super adjusts dials on reference portfolio as risk-return gauge edges up January 24, 2021
  • State Street wins Perpetual custody job January 24, 2021
  • New future-facing FAP compliance firm fronts up January 24, 2021

Primary Sidebar

WEEKLY NEWSLETTER

Sign up here to receive our weekly newsletter.
Learn More »

Most Recent Investment News

KiwiWRAP lays down investment backing tracks

January 24, 2021

Government to set eyes on PIEs as tax hike bites

January 24, 2021

Venture fund hires short-term chief, refits board

January 24, 2021

MJW finds KiwiSaver manager choice matters more at riskier end…

January 24, 2021

… as weight gain spread among mid-level schemes

January 24, 2021

Search by Keyword

Investment News

  • KiwiWRAP lays down investment backing tracks January 24, 2021
  • Government to set eyes on PIEs as tax hike bites January 24, 2021
  • Venture fund hires short-term chief, refits board January 24, 2021
  • MJW finds KiwiSaver manager choice matters more at riskier end… January 24, 2021
  • … as weight gain spread among mid-level schemes January 24, 2021
  • NZX admin unit confirms old client for new platform January 24, 2021
  • NZ Super adjusts dials on reference portfolio as risk-return gauge edges up January 24, 2021
  • State Street wins Perpetual custody job January 24, 2021
  • New future-facing FAP compliance firm fronts up January 24, 2021
  • How to fit ESG processes into UN’s sustainability goals January 24, 2021

Investment News Archive

Most Popular Articles

  • NZ share-trading splurge could trigger tax alarms… posted on October 5, 2020
  • Westpac NZ flags retail advice sale to Forsyth Barr posted on October 19, 2020
  • The horror year in technicolour: free KiwiSaver 13 report released posted on September 30, 2020
  • Flint set to spark platform competition posted on August 17, 2020
  • Four to the core: Smartshares to expand, rearrange and reprice ETFs posted on June 22, 2020
  • Kitset KiwiSaver scheme set to unwrap in spring posted on April 27, 2020
  • Funds eye bargains, self-shoppers hoard cash, KiwiSavers turn conservative posted on March 15, 2020
  • AMP Capital NZ chief quits amid equities exodus offshore posted on August 28, 2020

Sponosored Content

David-Boyle

On the industry play-list: four chart-topping regulations for 2021

David-Boyle

Charge of the lite (advice) brigade

Nathan Field

Pandemic Baby Boom a Bust

Star-date 2020: it’s inflation Jim but not as we know it

Quick-links to Popular News

  • FAP Compliance
  • Coronavirus
  • New Appointments
  • Financial Markets Authority (FMA)
  • Kiwisaver
  • Climate Change
  • Crypto Currency
  • Blockchain
  • Insurance

Secondary Sidebar

Recent News

  • KiwiWRAP lays down investment backing tracks January 24, 2021
  • Government to set eyes on PIEs as tax hike bites January 24, 2021
  • Venture fund hires short-term chief, refits board January 24, 2021
  • MJW finds KiwiSaver manager choice matters more at riskier end… January 24, 2021
  • … as weight gain spread among mid-level schemes January 24, 2021
  • NZX admin unit confirms old client for new platform January 24, 2021
  • NZ Super adjusts dials on reference portfolio as risk-return gauge edges up January 24, 2021
  • State Street wins Perpetual custody job January 24, 2021
  • New future-facing FAP compliance firm fronts up January 24, 2021
  • How to fit ESG processes into UN’s sustainability goals January 24, 2021

Footer

Copyright ©2020 InvestmentNews.co.nz — All Rights Reserved ·— Terms & Conditions