The GMO Asset Allocation team has released its latest 7-Year Asset Class Forecasts, which show emerging market equities are likely to generate the best real returns over the next seven years, though investors should temper their expectations for those returns. The firm forecasts emerging stocks to return 1.5% above inflation, compared with a 4.7% real decline for U.S. large caps and a 3% real loss for U.S. small caps. The comparison is even more stark with emerging market value stocks, forecast to return 5.9% above inflation.

“The impressive gains global equities realized in the fourth quarter resulted in a further decline in our seven-year real return forecasts,” says Rick Friedman, a member of GMO’s Asset Allocation team. “While our forecasts for emerging value equities declined, they remain the most attractive asset class we monitor, particularly emerging market value equities with an expected real return of 5.9%. On an absolute basis emerging value stocks look modestly expensive, but relative to the overall muted opportunity set they stand out as quite attractive.”

Underlying fundamentals improved as well in the fourth quarter, but those improvements are being well accounted for by equity markets. “When you’re not being paid much to take risk, choose your risk wisely,” says Friedman.

Source: GMO *The chart represents local, real return forecasts for several asset classes and not for any GMO fund or strategy. These forecasts are forward‐looking statements based upon the reasonable beliefs of GMO and are not a guarantee of future performance. Forward‐looking statements speak only as of the date they are made, and GMO assumes no duty to and does not undertake to update forward‐ looking statements. Forward‐looking statements are subject to numerous assumptions, risks, and uncertainties, which change over time. Actual results may differ materially from those anticipated in forward‐looking statements. U.S. inflation is assumed to mean revert to long‐term inflation of 2.2% over 15 years.

Copyright © 2018 by GMO LLC. All rights reserved.