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GMO: US Market Will Return Close to Nothing; Invest in High Quality

March 29, 2012 | About:

GMO has come out with their monthly market return forecasts. GMO has had a very good track record in forecasting future market returns and pointing out bubbles. These are GMO’s latest forecasts:

Asset Class Annual Real Return
US Large Cap 0.40%
US Small Cap -1.80%
US High Quality 4.40%
International Large Cap 4%
International Small Cap 3.30%
Emerging Market 5%
US Bonds 1.10%
International Bonds -2.50%
emerging Debt 0.80%
Index Linked Bonds -1.80%
Cash -0.60%

The numbers above are after the 2.5%/year inflation.

Therefore the best places to invest now are emerging markets and U.S. high quality stocks.

What Are High Quality Companies?

In an interview with Morningstar, Mr. Grantham was asked the question: How do you define high quality?

Jeremy Grantham: It is unbelievably ordinary: high return, and stable return and low debt. It is very similar to Moody’s ratings, and S&P ratings. Quality is quality, everybody knows it. If you have high and stable returns, and you can set the price, you are the price setter. You can only do that if you are a great franchise company. If you can do it, you don’t need any debt so you don’t have it. So to us, high quality companies are Coca-Cola (NYSE:KO), Microsoft (NASDAQ:MSFT) and Merk (NYSE:MRK).

Jeremy Grantham’s definition of high quality companies is very similar to Warren Buffett’s. Warren Buffett said many times that he prefers buying good companies at fair prices than buying fair companies at good prices. His good companies have:

  • Proven and predictable revenue and earnings growth
  • Sustainable price power and gross margin (moat)
  • Capable management
GMO’s forecast is very similar to what we have calculated with the market valuation based on the ratio of total market cap to GDP, Shiller P/E. These two indicators are predicting 2-4% of return (including inflation) for the coming years in the U.S. market.

For the global market, the best places to invest seem to be Singapore and Australia. Check out the details in the global market valuation page.

About the author:

GuruFocus - Stock Picks and Market Insight of Gurus

Rating: 3.0/5 (15 votes)


Vgm - 4 years ago
Monthly market return forecasts? Why bother?

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