Another emerging market bear. GMO’s founder Jeremy Grantham has a good track record*. He called the recent crisis correctly in a timely manner. FT reports:
His candidates for potential bubbles are emerging markets and commodities. The former is a no-brainer: “it’s correct; they will have better GDP [growth]”. He does not think valuations will go as high as in Japan or on internet stocks, but a 50 per cent premium is possible. “Let’s say the market at 15 [price/earnings ratio] and these guys at 22.5.”
Should investors try to grab a piece of that, or steer clear? Mr Grantham would personally like to join in, “as an individual”. But he is not certain it is a good policy. The question is, “if you want to buy bargains, when do you knowingly overpay a bit, because you see a queue of people outside ready to buy?
“We haven’t settled that internally. We like the idea of exclusively playing the long-term winning bets. Why mess around with the secondary considerations?”
The question is even harder to answer with regard to commodities. The story here is “we’re running out of everything” but it is a long-run story beyond the time horizon of most clients. Investors can probably make money, “but the tricky problem is overpaying upfront. The price has shifted.Those with a genuine 10-20-year horizon “should own people who own the resources”, because there is no money in processing, only in ownership.
His GMO forecasts rank asset classes in order of expected real return, and Mr Grantham is particularly pleased with the 10-year forecast ending December 2009.
This had US Reits (real estate investment trusts) at the top of the list followed by emerging market equities, and the S&P 500 at the bottom in 11th place. In the event, emerging market equities did best, returning 8.1 per cent a year after inflation (the forecast was 7.8 per cent), Reits were third with 7.4 per cent (10.0 per cent), and the S&P was last with -3.5 per cent (-1.9 per cent). The ranking of the assets in between was almost spot on. The probability of getting that right by chance was 1 in 550,000, says Mr Grantham.