By Brett Arends, MarketWatch
BOSTON — Look out for the bonds of big foreign countries, especially in Europe.
Prices have boomed, but investors are on a hiding to nothing. There’s a good chance they’ll lose money, and some chance we’ll even see a sharp sell off.
So, at least, says Ben Inker , the co-head of asset allocation at GMO, the famous white-shoe Boston money management firm, and one of the wiser heads in the investment world.
On a morning when the temperature in Boston fell below that of Fargo, N.D., and Anchorage, Alaska, I picked my way through the ice and bitter winds to get the latest financial forecasts from Inker at the GMO headquarters down by the harbor.
And some of Inker’s outlook seemed as Arctic as the weather outside.
Financial forecasts are generally about as reliable as weather forecasts in New England, but those made by GMO are worth some attention, for two reasons. Firstly, their “forecasts” rely more on past history and current valuations than they do on trying to read a crystal ball. Secondly, GMO has the record of having successfully anticipated the crashes of 2000-2003 and 2007-2009.
GMO is now betting heavily against bonds issued in the eurozone and elsewhere, Inker said. Prices are too high, he says, and yields are too low. (Bonds are like seesaws: When the price goes up, the yield goes down).
Thirty-year German bonds /zigman2/quotes/211347116/realtime BX:TMBMKDE-30Y +11.08% , known as bunds, sport yields of barely 1%. Long-term bonds issued by countries such as the Netherlands, France, or Japan are little better. Investors who own these bonds are taking bigger risks than they may realize, he said. They are basically betting that short-term interest rates in these countries will stay 0% for years, maybe even decades, to come. Good luck with that, as people say.
That’s not all.
GMO is also predicting icy returns from many other investments as well. That includes the more fashionable stocks on Wall Street — where the Dow Jones Industrial Average /zigman2/quotes/210598065/realtime DJIA +0.29% just hit a new high — and overseas.
So where should MarketWatch readers, and other investors, look for opportunities for our portfolios?
Look at emerging markets, says Inker. But don’t look at the hot stocks, such as China’s booming Alibaba /zigman2/quotes/201948298/composite BABA -0.31% or Tencent /zigman2/quotes/204605823/delayed HK:700 +1.94% . /zigman2/quotes/207908563/composite TCEHY +1.39% Look instead at the unfashionable and unloved “value” stocks, such as Korean industrials or Brazilian utilities.
Inker thinks a broad portfolio of such stocks could beat inflation by around 7% a year over the next seven years — meaning it will gain value in real terms by around 60%. (And that’s not even counting returns from hard-hit commodity stocks).
Obvious but important caveat: This is only a forecast, and is far from certain. It’s based on current valuations and some basic assumptions about the future. All stocks are risky, and emerging markets can be especially so. Time and chance will happen to them all.
Inker can’t talk names, but according to filings, GMO’s biggest emerging-market stock holdings as of Dec. 31 included Samsung Electronics /zigman2/quotes/209800866/delayed KR:005930 -0.24% , three Chinese banks (China Construction Bank Corp. /zigman2/quotes/207732534/composite CICHY +0.66% /zigman2/quotes/208058581/delayed CN:601939 0.00% , Industrial & Commercial Bank of China /zigman2/quotes/202525815/delayed CN:601398 -0.37% , and Bank of China /zigman2/quotes/200548463/composite BACHF +5.07% /zigman2/quotes/209359942/delayed CN:601988 +0.61% ), China Mobile , and a couple of Russian gas companies: Surgutneftegaz and Gazprom ).
Ordinary investors who want to follow suit are probably best advised to steer clear of individual emerging-markets stocks and instead use a low-cost, broadly based mutual fund. Two good emerging-markets value exchange-traded funds are PowerShares’ FTSE RAFI Emerging Markets Index fund /zigman2/quotes/207746108/composite PXH +0.47% and iShares’ Emerging Markets Value . Both have expenses of 0.49% of assets per year.
How much should a normal person wager on such investments? Emerging markets are risky. Even where clients have given GMO a free hand, Inker says the firm has put only about 18% of its equity portfolio in emerging markets. He expects that to rise to around 25%. As the firm has only put half its portfolio in equities, it suggests the sensible long-term investor might think about putting somewhere between 10% and 13% of their portfolio in emerging-market value stocks.