There are only three investment exposures worth seeking in the “seven lean years” ahead, according to Jeremy Grantham, co-founder and strategist at the famously bearish funds manager, GMO.
Grantham argued that equities – importantly, only US high-quality and emerging market stocks made the cut – and timberland provided the best opportunities for outperformance in the turgid, low-growth years ahead.
Speaking in Sydney yesterday, Grantham pointed to GMO’s seven-year asset class return forecast, dated April 30, to show that the manager’s exposure to US high quality stocks were expected to generate a 7.6 per cent return, emerging markets 8.4 per cent and timberland 7.5 per cent.
The forecasts include GMO’s expectation of its own outperformance against market indices. For US high-quality stocks, this was calculated to be 1.8 per cent above the asset class index return, and 3.7 per cent for emerging market equities. GMO expects that its timberland portfolio, which includes an Australian forest, should outperform the broader market by 1.5 per cent.
Grantham said US high quality stocks were currently “as cheap as they’ve ever been” and that emerging market equities should absorb much of an investor’s risk budget. In addition to favourable return expectations, an exposure to timberland should also be sought to provide diversification – or “to be different”.
The GMO forecast pertains to the “seven lean years” Grantham said global markets were now confronting, defined by the intractable problems “we all know about”, such as developed world deleveraging, trade imbalances and moral hazard.
This environment would follow the big ‘recovery’ rally of 2009, which Grantham viewed as “the most speculative rally in decades,” or more accurately, since the Depression-era bear market rally of 1932.