Most Popular ArticlesJune 2, 2009
The market outlook
Grantham compared the current market to the 1970s when he made a lot of money, but warned that investors must recognize we are in a range-bound market.
His team does a forecast every month, and project returns by asset class over a seven-year period. Just over 10 years ago, in September of 1998, they forecast real returns of -1.1% for the S&P 500 and 10.9% for the emerging markets. This 12-point gap translated to a 310-to-1 performance advantage by picking the right asset class.
Grantham faulted institutions that spend time chasing alpha through mutual fund or security selection, questioning how many correct choices they must make to improve performance. “Big asset classes drive success and are very inefficiently priced – amazingly inefficiently priced,” he said.
Current bearish sentiment is fueled by analysis which projects S&P valuations based on comparisons to historical markets. If the market follows the path of the Great Depression, the S&P will bottom at 300. The equivalent for the 1974 bear market is 450, and the 1982 market’s equivalent is 400.
“You can see why there are bears,” Grantham said, but added he has “parted with the bears.” He has more confidence in the resilience of economies than they do, based on the experiences of Germany and Japan after World War II. “We are not the delicate flower that the bankers tell us we are. We can handle a couple of Lehman-like bankruptcies,” he said.
“What separates me from the bulls are the seven lean years,” Grantham said, noting that his sentiment lies between the bulls and the bears.
He is markedly optimistic about the long-term prospects for the US economy. “Debt doesn’t matter – it’s just an accounting entry and not real life,” he said. “Unless you blow up factories, the economy will come roaring back.” He expects the developed economies to grow at 2.4%, but emerging markets to grow at 4%.
He warned of an emerging emerging market bubble, and cautioned investors that there is no connection between making money and top-line GDP growth. Leaders in those markets have objectives, such as protecting jobs, which may conflict with maximizing shareholder return. “You make money in companies through the filter of return on equity,” Grantham said, and not by betting on high growth economies.
“China will achieve monster GDP growth, but there is no guarantee at all that it has anything to do with the returns you will make on Chinese stocks,” he said. The only correlation to high returns is investing at a low starting value.
Grantham hates gold as an asset class, and never invested in it until last fall, when he broke his vows and bought some because he thought a state of panic was about to unfold. “I was perfectly right, but I still lost money,” he admitted.
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