Events | July 20, 2022

Deploying Capital in a Bear Market

New Opportunities Created by Recent Market Volatility


The first half of 2022 took investors on a wild ride as equities swooned and bonds got off to their worst year on record. Inflation, rising rates, hawkish central banks, and the possibility of recession led to an environment in which valuations once again mattered. In this webcast, we discuss these issues with GMO portfolio managers and their impact across multi-asset, bonds, and stocks. We provide an update of our top-down Asset Allocation views and positioning while also delving into the most compelling opportunities we see today, including High Yield and Resource equities.

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Key Points

  • Investors prize high profits, stable economic growth, and inflation around 2%, paying higher multiples for equities when these conditions are met. A significant rise in inflation and economic uncertainty have weighed on valuations, but equities are certainly not cheap, and valuations have historically been cheaper when discomfort has been this high.

Investors still seem too comfortable

Today we see the biggest deviation in GMO’s Comfort Model since the internet bubble

Deploying Capital in a Bear Market_7-20-2022_Exhibit 1.JPG

As of 6/13/2022 | Source: GMO

  • The range of outcomes remains wide for economic growth, earnings, and equilibrium interest rates. As such, we recommend building portfolios that are robust across potential outcomes rather than optimized for a specific set of assumptions.
  • Significant declines in asset prices have, however, created a more compelling environment to take risk. We are judiciously adding to risk assets because we know value signals are most efficacious on a lagged basis. Should valuations stay constant from this point, we would expect to continue adding to attractively priced risk assets.

Getting paid closer to normal to take risk

Slope of the Risk/Return line - 12 month moving average returns of blended scenarios

Deploying Capital in a Bear Market_7-20-2022_Exhibit 2.JPG

As of 6/30/2022 | Source: GMO
The expectations provided above are based upon the reasonable beliefs of the Asset Allocation team and are not a guarantee. Expectations speak only as of the date they are made, and GMO assumes no duty to and does not undertake to update such expectations. Expectations are subject to numerous assumptions, risks, and uncertainties, which change over time. Actual results may differ materially from those anticipated in the expectations above.

  • We like Resources equities, which are cheap versus history and provide inflation sensitivity, and High Yield, which provides attractive yields over 8% and thus the potential to defend against higher rates and wider spreads. Furthermore, alpha opportunities are attractive within both asset classes.


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Disclaimer: The views expressed are through the period ending July 2022, and are subject to change at any time based on market and other conditions. This is not an offer or solicitation for the purchase or sale of any security and should not be construed as such. References to specific securities and issuers are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities.
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