GMO Now 50% in Cash

James Montier said that GMO’s 7 year asset allocation model for US stocks is now predicting  negative returns. GMO are now 50% in cash.  While they've been known to hold higher levels of cash than most investors, this seems to be taking things a step further.  They still hold some investments in Japan but he  indicated that they are likely to be selling over the next couple of months.

He said that a year ago the model was indicating good returns in Europe but now it only suggests  2.5% real return per annum. He said that they are a bit frightened to follow the model in Europe  because of the leverage at the company level, particularly in the financial sector.

Their model suggests that the best value is in emerging markets where 6% real is forecast. However,  he mentioned that the research by his colleague, Edward Chancellor, which has identified an asset  bubble in Chinese real estate, has made GMO cautious and led them to allocate less to EM than the  model would suggest.

It is clear that at certain times GMO are prepared to overrule their  quantitative asset allocation models when other evidence suggests caution.