Jeremy Grantham: Market Valuations are better now. Buy High Quality Blue Chips | Investment Moats Skip to Content

Jeremy Grantham: Market Valuations are better now. Buy High Quality Blue Chips

Drizzt:

Jeremy Grantham is someone I really like to read up on, simply because he managed to forecast the long term returns of 10 asset classes and got them correct.

I think that is no mean feat, people always forecast and in the end it is pretty far off. This goes to show his valuation model is great.

In this article 2 days ago, he talks that valuations have become better than months ago. And though he have an opinion on farmland and agriculture being the next super bull, he still advocate holding High Quality Blue Chips and great European blue chips.

Read some of my past postings on him here.

Value stocks, rich market

Grantham also doesn’t approve of Federal Reserve Chairman Ben Bernanke taking steps that he said essentially have put savers in a box. Keeping interest rates low, and stating that rates will remain in the cellar for at least a couple of years, forces people to take more risk with their money if they want yield and capital appreciation.

“You’re transferring money away from retirees” who must either delve into stocks, gold or some other higher-stakes investment, or languish in savings accounts and low-yielding bonds, Grantham said. “They could use that money. They would spend every penny.”

Instead, Grantham said the Fed’s policy puts money “in the hands of people who aren’t spending it — people who only buy BMWs and don’t support Wal-Mart.” This creates a vicious cycle in which, Grantham said, individual savers are penalized and restrain spending, while the beneficiaries are “bankers and corporations that can build factories all over the place — except they won’t because consumption is too weak.”

Accordingly, Grantham sees this path coming to no good end over the short-term. He said he expects another leg down for the U.S. stock market, one where shares could stay low-priced for years while U.S. economic growth plods along at maybe 2% annually instead of the relatively more robust historical average of around 3.4%.

But Grantham is an investor, not a politician, so his job is to hunt down opportunities in bull or bear markets. Nowadays, he’s finding more stocks that fit GMO’s strict value-investing discipline.

“If we adjust earnings to normal and apply an average P/E, you can finally build a decent portfolio today of global equities at a respectable long-term return,” he said.

The potential for gains is “modestly higher” outside of the U.S., he added, other than “high-quality blue-chips.” Mostly, he said he prefers discounted plays that are surfacing in Europe and emerging markets.

“In stocks you will eventually do OK at these prices,” Grantham said.

“The real danger is one or two of these building blocks falling over,” Grantham said. “You can buy a whole portfolio of slightly cheap global stocks, and the risk you take is that you get sandbagged by some of these major problems.”

Indeed, Grantham said that since there’s a “decent chance” of stocks becoming even cheaper, GMO is positioned slightly below normal in equities “because the risk profile of the world is way over normal.”

At the same time, he’s not jumping on the long-term-bond bandwagon. “One day we will have more inflation and our bonds will bleed like a pig,” Grantham said. “The only reason for buying long bonds is short-term or as a desperate haven for terrorized investors. But the potential to make longer-term real money is naught.”

Grantham runs a personal, non-profit foundation dedicated to the protection of the environment. For the foundation he has invested heavily in agriculture, commodities and natural resources. Timber is a favorite, as are fertilizer companies. He’s not a big fan of gold. “I own some myself as a pure speculation,” Grantham said — “just enough to mute the irritation of watching gold [prices] rise.”

For others, Grantham advised taking a page from GMO and buying shares in companies with strong finances and which produce goods that people need, as opposed to luxury items. Look for dividend-paying opportunities in emerging markets especially. “I would own emerging and EAFE (the MSCI Europe, Australasia, and Far East Index), including Japan,” Grantham said.

“In the end everything comes down to value, and they have suffered a lot more recently,” he said of non-U.S. markets. “Yes, it can get whacked in the next 18 months if the wheels come off, and the possibilities are likely, but if you hang in anyway you’ll make a respectable return.”

[Read the full article here >>]

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