Grantham Gloomy, But Finding Value

GMO’s Jeremy Grantham is predicting more gloom for the U.S. economy, but he says stock valuations are “finally” such that investors can build portfolios of equities with potential for solid long-term returns.

“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,” Grantham tells MarketWatch, adding that the potential for strong returns is a bit better outside the U.S., except for high-quality blue-chip stocks. “In stocks you will eventually do OK at these prices,” he says.

Grantham is particularly interested in financially sound companies that make necessities, not luxury items. And he likes dividend stocks in emerging markets. “I would own emerging and EAFE (the MSCI Europe, Australasia, and Far East Index), including Japan,” he said. “In the end everything comes down to value, and [non-U.S. markets] have suffered a lot more recently. 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.”

Grantham is a lot less keen on the broader market and economy. He sees another leg down for the U.S. market, which could leave shares trading cheap for years. He also sees economic growth to be only about 2% per year for some time. And, with major problems in various areas of the world, he says it’s unclear how a major negative event in one place would impact other areas. “We have these basically distinct problems joined only by a general fragility of the financial system,” he says. “So you can’t know for sure that if China stumbled it wouldn’t set off something else, or if the U.S. goes into a double-dip [recession], it won’t set off a European bank failure.”

He’s also very concerned about the disparity in the U.S. between average workers’ income and the top wage earners’ income. And, he says, the rich need to be paying more taxes than they are now.

Finally, Grantham is bearish on bonds. “One day we will have more inflation and our bonds will bleed like a pig,” he said.