GMO’s Catherine LeGraw on emerging markets, trade tensions


The recent rally to record highs in U.S. stocks may feel like reason to celebrate, but one investor suggests a better bet may be overseas.

GMO’s Catherine LeGraw believes that while U.S.-based stocks tend to be of a higher quality, investors can find far more affordable deals in emerging market equities.

“We have historically wide spreads across equity markets. You have a great opportunity to concentrate your investments in the cheaper areas; I’d primarily highlight anywhere outside the U.S.,” Legraw said in a talk with CNBC Pro
. “Europe, Asia, Japan for the developed markets, and in particular, our favorite group of stocks, the emerging markets.”

“Avoid the U.S. It’s done the best and today it’s the most expensive.”

Legraw, whose investment strategies are based on seven- to 10-year time frames, conceded that while GMO’s models have warned investors away from expensive American stocks, U.S. equities have generally outperformed the rest of the world within the past several months.

Both the S&P 500 and the Dow Jones Industrial Average hit new all-time highs Friday as a swell in technology stocks and moderating trade war fears ushered stocks higher.

Popular growth-heavy stocks such as chipmaker Advanced Micro Devices and e-commerce giant Amazon have soared past the traditional stock indexes with gains of 203 percent and 64 percent, respectively.

But the obsession with U.S. growth stocks leaves behind far better deals overseas, LeGraw said.

“Even if you think growth is going to be great in the future, you have to pay a massive premium to invest in U.S. stocks today,” she said. “So we think you’re much better off buying emerging market stocks at a roughly 50 percent discount to the U.S. equity market and capturing a huge margin of safety.”

The December 2019 price-to-earnings ratio of the iShares MSCI Emerging Markets exchange-traded fund on a forward-looking basis is 10.8 as of Sept. 21, the S&P 500’s ratio hovers at 16.5. The tech-heavy Nasdaq Composite’s December 2019 ratio sits at 21.2.

LeGraw is a member of GMO’s Asset Allocation team. Prior to joining GMO in 2013, she worked as a director at BlackRock. Previously, Ms. LeGraw was an analyst at Bear, Stearns & Co and she is a CFA charterholder.

As of March 2018, GMO had $71 billion in assets under management.

See here for the full CNBC PRO report and interview video.

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