Partners in Investing

The Asset Allocation Team’s second quarter market review and outlook.

Has alpha become disproportionately important to beta? At GMO, we think it has. In fact, the forecasted potential return to alpha on our data is the highest we have observed in nearly 20 years.

Profitable trades never happen in a straight line. Growth may have beaten Value in June, but our Equity Dislocation thesis remains intact. Value still deserves to win, by a lot.

Quality stocks have tended to fare well versus the broad market during inflationary times. Paying attention to valuation alongside quality has delivered even better results.

The S&P 500 is full of great companies with great prospects. We don’t dispute that. But that is missing the point. Our worry is the prices you are paying for that growth.

Historically, resource equities have not only protected against inflation, but have actually dramatically increased purchasing power during inflationary periods.

The signs of speculative excess in the stock market today are obvious. Speculative booms provide entertainment and outsized profits while they are happening, but they do generally burst painfully.

An EM ex-China strategy is critical in precisely targeting the China allocation in EM investments, and active top-down country and sector allocation is an indispensable source of alpha in EM ex-China.