Jeremy Grantham, co-founder and chief investment strategist of GMO LLC, has an excellent reputation among investment managers due to many of his prescient statements of the past. He and his asset allocation team garner attention when they publish their commentary and 7-year forecasts on asset class returns. GMO is currently cautious about the US stock market but selectively optimistic about pockets of opportunity. Their comments reflect a defensive stance at the present time.
In his March 11 commentary, Jeremy Grantham writes that “the U.S. is really enjoying itself if you go by stock prices. A Shiller P/E of 34 (as of March 1st) is in the top 1% of history. Total profits (as a percent of almost anything) are at near-record levels as well. Remember, if margins and multiples are both at record levels at the same time, it really is double counting and double jeopardy.” However, while U.S. stocks are generally overpriced, he believes that there are some relatively attractive investments. He highlights quality, resource, and deep value stocks.
Quality stocks are defined at GMO as stocks with a high stable return on equity and a strong balance sheet. Grantham argues that they have “a long history of slightly underperforming in bull markets and substantially outperforming in bear markets.”
Grantham likes resource stocks that provide raw materials which are finite and getting scarcer. He also likes the diversification benefits because “at longer horizons (10 years) resources are the only sector of the stock market to be negatively correlated with the broad stock market.”
There has been a divergence in valuations among U.S. stocks. Deep value stocks (the cheapest 20% of the US market) “are in the best 7% of their range” while the most expensive 20% of U.S. stocks “are in the worst 10% of their 40-year range (compared to the top 1000 stocks).”
As of February 29, 2024, GMO is forecasting an annualized real return (for 7 years, after inflation) of -4.1% for US large cap stocks and -2.6% for US small cap stocks. They have higher expectations for international stocks, with a range that varies from a low of 1.1% for international large cap stocks to the highest ranked category of emerging market value stocks at 5.8% (after inflation, in local currency terms). In terms of US dollars, GMO expects an additional 2 to 4% per year from currency gains for international stocks.
GMO has modest expectations for fixed income. At the end of February, their 7-year forecast for fixed income has real returns (after inflation) for U.S. bonds and U.S. inflation-linked bonds of 1.7%. The highest ranked category is emerging debt at a 3.5% real return.
GMO does not provide any forecasts for precious metals, but they are starting to receive more attention. Central banks and investors continue to buy gold, primarily due to the rapid growth of US government debt and interest expense. Also, the geopolitical landscape is changing and the world is less willing to follow America’s lead.
Silver demand is picking up as well. India imported a record 2,200 metric tons of silver in February 2024, a portion of which will be used for lithium-ion battery production at a new factory.
If you would like to read more research directly from GMO, it is available to the public here: https://www.gmo.com/americas/
If you have any questions or comments, please contact me.
Sincerely,
Robert G. Kahl
CFA, CPA, MBA