“The U.S. stock market looks like a pretty poor risk-reward trade-off, and bonds have a very low expected return — the familiar assets stink. Now is one of those times when you might as well be taking as much risk with the non-familiar assets as you and the client can be comfortable with.”
That’s the recommendation to financial advisors from Ben Inker, head of GMO’s asset allocation team, in an interview with ThinkAdvisor, in which he offers some “non-familiar” suggestions.
At the same time, and as demonstrated by the selloff earlier this week, Inker sees a “loss of fervor on the part of the momentum/retail players at the highest valuations end” of the market. “The crazy end of the market is starting to deflate,” he says.
Indeed, “The speculative end of the market has been doing poorly for at least the last couple of months”; and, Inker says, “truly loony prices have started to come down.”
But the chartered financial analyst points to a different scenario as well, one painted this past January by Grantham Mayo Van Otterloo co-founder Jeremy Grantham, who detected a “late-stage major bubble [in growth stocks]” that, he wrote, “will be recorded as one of the great bubbles of financial history.”
As of a few days ago, he hasn’t changed his stance, Inker reports. The GMO chief investment strategist forecasts that once the speculative bubble bursts, the entire market will collapse.
In the interview, Inker, a member of the GMO board of directors who joined the firm in 1992 fresh from earning a B.A. in economics at Yale University, argues that the surprisingly big rise in month-over-month inflation — the trigger that chiefly sent the market plummeting this week — is only a temporary condition, not the start of a pattern.
Meanwhile, the market rotation to value stocks from growth equities, which began late last year, continues as the business of companies hit hard by the coronavirus pandemic is starting to pick up, with consumers’ pent-up demand turning into spending.
Over the years, Inker has served at GMO as an analyst, portfolio manager, co-head of International Quantitative Equities and CIO of Quantitative Developed Equities.
ThinkAdvisor interviewed Inker by phone on Wednesday. He was speaking from Boston, where GMO is headquartered. The value investor is more than pleased with the performance of value stocks thus far this year.
“We’re seeing the rotation continue — and it deserves to continue,” he says. “The economy is really opening up. That’s good for these companies.”
Here are highlights of our interview:
THINKADVISOR: In view of this week’s selloff, should financial advisors be rebalancing their clients’ portfolios?
BEN INKER: Financial advisors should be having real conversations with their clients about what matters more: risk or return. The U.S. stock market looks like a pretty poor risk-reward trade-off, and bonds obviously have a very low expected return.
U.S. stocks are probably the wrong place to sit, but there’s a limit to how aggressively most advisors are going to want to push their clients out of the familiar assets and into the unfamiliar. But now is one of those times when you might at least be taking as much risk with the non-familiar as the client can be comfortable with because the familiar assets stink.
What non-familiar assets do you suggest investing in?
We warmly recommend non-U.S. stocks, and we quite like a variety of liquid alternatives instead of stocks and bonds.
Our long value/short growth strategy is our favorite for these times. It’s been working pretty well the last few months, and we think it has plenty more room to run.
Many investors seem to be waiting for the other shoe to drop; that is, a big correction. What validity is there to that?
Certainly if you look at investor behavior right now, people aren’t investing as if they think it [will happen]. Portfolios are positioned on the very bullish end of things.
There are those of us who have been saying for a while, “This market looks pretty expensive. That doesn’t seem like a great investment.” But if people have started listening to us, it’s news to me!
Where do you stand now in terms of the “late-stage major bubble” Jeremy Grantham [GMO co-founder] pointed out this past January?
I can see two scenarios. One is: There’s a speculative bubble — a bunch of speculative growth stocks that have been trading at truly loony prices. Those stocks have started to come down.
Some of the stocks that were, kind of, poster children for the go-go time have gotten hit. If the bubble is confined to the crazy end of the market, it does look like that’s starting to deflate, though it has plenty more room to go.