Wednesday, June 27, 2012

Jeremy Grantham Sees 'ho-hum' returns for next 7 years

From Money Magazine:
Jeremy Grantham has attracted a cultlike following to his quarterly investment letters. For good reason: The chief investment strategist at Boston asset manager GMO warned of dismal returns ahead for U.S. stocks in the 2000s and predicted the bursting of both the technology and housing bubbles.

Lest you get the impression Grantham is a permabear (a label he hates), in his March 2009 letter he advised snapping up U.S. stocks just as they were plunging to their nadir in the financial crisis. Those who bought profited from one of the most powerful market rallies ever. No wonder Grantham was the top choice of MONEY readers for this month's Game Changers interview.

These days Grantham, 73, is downbeat about the prospects for most, but not all, stocks. A student of history, he has much to say about why markets get out of whack, and why we may be entering a period in which resource scarcity is again an issue for society -- and an opportunity for investors.
Contributing writer Janice Revell spoke with Grantham, who also answered questions from readers. The conversation has been edited.

How do you go about finding the best opportunities?
The great opportunities are much more likely to come at the broader asset class level than from individual stocks.
Asset classes -- stocks, bonds, commodities -- get very badly mispriced. That's because they come with enormous career risks for institutional investors. As a professional, you can afford to pick some stocks and be wrong about a few of them. To keep your job, you cannot take the risk of being seen to be wrong about the "big picture" for very long.

How did the price/earnings ratio of the S&P 500 get to 35 in 2000, compared with the long-run average of 15?
You had a massively mispriced market, and it was talked about all over the place. But no one would step aside. Institutions couldn't bring themselves to do that because they would have been skinned alive for their conservatism.

So asset allocation is an enormous opportunity, but only if you're willing to take considerable career risks. Playing against the tech bubble was unbelievably painful for us for two years, and then eventually, of course, it paid off handsomely.

How do you avoid getting sucked into bubbles yet still get some benefit from rising prices? -- Ray Ng, Scottsdale
Remember that history always repeats itself. Every great bubble in history has broken. There are no exceptions.

At GMO, we have a database of 35 bubbles. Of the 33 that have ended, every one broke all the way back -- not halfway back -- to the trend before the bubble started....MUCH MORE
HT: Abnormal Returns 

Back in 2009 we linked to GMO's 7-Year Asset Class Return Forecast:

GMO 7 year asset class forecast Sept 2009

To sum up, their predict that:
  • the S&P 500 will return less than 5% annually over the next 7 years.
  • international equities are expected to perform better, but not by that much
  • US government bonds are among the lowest return asset class (1.7%)
  • once again, timber makes an appearance with a 7.5% expected return
In comparison, GMO’s prediction of asset class returns just before the financial markets went into a tailspin in 2007 looked quite different:
  • the S&P 500 forecast was -2%
  • US ‘low quality’stocks were expected to return -10%
  • US government bond returns were forecast at just 3%
  • and timber was still high, at 6.5% annual return...MORE
The last monthly forecast I saw was May 2012:
  • US Large caps: 0.8% per year
  • US Small caps: -0.5% per year
  • US High Quality: 4.8% per year
  • International Large caps: 6.1% per year
  • International Small caps: 5.3% per year
  • Emerging Markets: 6.7% per year
Here's GMO home and Mr. Grantham's last quarterly letter. Q2 should be out next month.