GMO's James Montier Picks Emerging Markets in World Starved of Value

  • Strategists tell investors to ‘Just Say No’ to U.S. equities
  • Spread between EM and U.S. shares is in 90th percentile: GMO

Investors should buy emerging-market equities and shun U.S. stocks because valuations are too expensive, said James Montier, a strategist at Grantham Mayo Van Otterloo & Co.

Developing-nation stocks may return 2.9 percent annually over the next seven years, while emerging-market debt could yield 0.7 percent a year, according to an analysis released this week by Montier and Matt Kadnar, part of the firm’s asset allocation team. They expect negative returns for U.S. large and small-cap stocks over that period.

“The cruel reality of today’s investment opportunity set is that we believe there are no good choices from an absolute viewpoint -- that is, everything is expensive,” they wrote in the report. “You are reduced to trying to pick the least potent poison.”

The investment firm, co-founded by Jeremy Grantham who is known for his often bearish views, is echoing concerns by other investors over America’s eight-year long bull market. So should we buy U.S. stocks?

“If our goal is compounding capital for the long term, which it is, we would not just say “No,” but something akin to “Hell no!” the analysts wrote.

Instead, their valuation models point to emerging markets, where price-earnings multiples relative to U.S. shares “provide very strong return.” Domestic currencies should add another tailwind. That’s even after a 24 percent gain in the MSCI Emerging Markets Index this year, more than double the S&P 500 Index’s advance.

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