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Tags: Inker | quality | stocks | cash

GMO's Inker: Investors Should Buy Quality Stocks, Not Hide in Cash

By    |   Thursday, 01 August 2013 08:03 AM EDT

Investors should stick with high-quality U.S. stocks instead of hiding in cash because the risk-reward odds are favorable, according to Ben Inker, head of asset allocation at Boston-based money manager GMO.

In an interview with Morningstar, Inker acknowledged all asset classes may do poorly if interest rates continue to rise.

"That is a risk that exists today in the markets because of the very, very low discount rate," he said.

Editor's Note:
Billionaires Dump Stocks. Prepare for the Unthinkable.

"That makes everything somewhat riskier, but it doesn't mean you want to sit there and hold cash unless you know rates are going to rise soon because sitting in cash you are earning nothing and in the meantime sitting in other assets you're earning something."

In Inker's longer-term forecast, U.S. high-quality stocks will produce a "modest but decent return," while the rest of the U.S. equity universe has a negative seven-year outlook, Morningstar noted.

Inker defined a high-quality stock as one that has high profitability throughout an economic cycle, stable profitability and low debt. Some such high-quality stocks are trading at a lower price-earnings ratio than the broad market is, so investors can obtain them at a discount, he noted.

Inker said one problem for the U.S. economy is that companies have been investing very little in their own businesses.

"So our best guess is that profit margins will be under pressure for the next five or 10 years, just because of the unsustainability of supporting demand without sufficient household income growth."

While Inker conceded that some emerging markets looks attractive on a valuation basis, China is not among them.

"China has a fixed-asset investment bubble and a credit bubble and a real estate bubble," he declared.

Inker sees some promise for European stocks because, compared with the United States, "valuations are lower and expectations are worse." But he has been selling Japanese holdings on grounds they are no longer attractively priced.

In a guest column for The Globe and Mail, John Reese, CEO of Validea Capital, said most stock forecasts are for the birds, especially short-range forecasts.

"[Warren] Buffett and other greats such as Peter Lynch, Joel Greenblatt and Benjamin Graham aren't swayed by analysts' forecasts or pundits' predictions," he wrote.

"They have ways of analyzing companies, digging into their balance sheets and fundamentals, and they look for good businesses whose shares they can buy on the cheap. Often, these companies have short-term clouds hanging over them — that's why their shares are cheap."

Editor's Note: Billionaires Dump Stocks. Prepare for the Unthinkable.

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InvestingAnalysis
Investors should stick with high-quality U.S. stocks instead of hiding in cash because the risk-reward odds are favorable, according to Ben Inker, head of asset allocation at Boston-based money manager GMO.
Inker,quality,stocks,cash
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2013-03-01
Thursday, 01 August 2013 08:03 AM
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