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%|
|Index Linked Bonds||-1.80%|
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
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.
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