GMO, the US asset manager, forecasts US large caps to return -3.1% annually over the next seven years. That would make the asset class the worst returning one over the period. This in fact wouldn’t be entirely surprising as US equities have outperformed all other major equity asset classes by a factor two to three since 2009.
GMO’s forecast, which is based on return on equity and price/earnings ratios relative to history, chimes with a prediction made by Wellershoff & Partners last year. On the basis of the cyclically adjusted price/earnings ratio, the Swiss financial consultancy predicted an annualised return of 1.9% over the subsequent five years. Since their prediction was made at the end of January last year and the S&P 500 increased by about 20% since then, this implies the index would have to shed some 10% of its value over the next four years for their prediction to come true.
Source, the ETF provider, is in the same camp. It took the occasion of Donald Trump’s inauguration as the 45th President of the United States to warn investors of having too high expectations of US equity market gains during his tenure.
“With the S&P 500 currently on a Shiller Price-Earnings ratio of more than 28, it is unlikely that it will do better under President Trump than under Obama,” said Paul Jackson, head of research at Source.
“Such a high Shiller ratio is more commonly associated with negative future returns,” he added, reminding US equity bulls that the double-digit annualised returns during the Obama and Reagan presidencies were helped by the low valuations when they assumed office.
“President Trump does not have that luxury. He should not measure himself by what the US stock market says as I fear the judgement will be harsh no matter what he does,” Jackson concluded.
An emerging alternative
So where should investors turn instead to find returns? They must come to terms with the reality that returns are going to be much more modest going forward. Only emerging market equities still shine somewhat. GMO foresees annualised returns of 4.4% from the asset class over the next seven years. That again corresponds with last year’s forecasts of Wellershoff & Partners, which also identified EM equities as the asset class with the highest return prospects.
Emerging markets, however, of course come with a risk. The asset class is traditionally volatile, but the Trump factor has only added to the uncertainty.
“We are neutral EM equities now,” says Rob Brand, head of tactical asset allocation at Blue Sky Group, a Dutch pension investor. “We are waiting for more clarity about Trump’s stance on trade agreements before taking a view.”