Brett Arends , writing in the Wall Street Journal, tackles the topic of what investors should do if the United States loses its economic leadership in the world. It's definitely worth a read, even for Canadian investors.
But one part of the column stuck out as particularly interesting: Mr. Arends pointed out that GMO LLC - a respected money management firm based in Boston and headed by Jeremy Grantham - has taken a contrarian approach with its updated asset class return forecasts.
No longer is GMO particularly bullish on emerging market equities. Now, GMO believes that the best return potential is with high quality U.S. stocks, which have lagged most of the rest of the world during the stock market rebound of the past seven months.
As of Sept. 30, GMO forecasts that these high quality stocks will deliver average gains of 8.9 per cent over the next seven years, well above their long-term average of 6.5 per cent after inflation. This forecast puts these stocks at the top of the list of six equity classes. The firm expects international large-cap stocks will return 5.5 per cent average gains, while emerging market stocks - which have zoomed higher in recent months - are forecast to return just 3.9 per cent.
What's key here, though, is the term "high quality" - which generally refers to companies with growing earnings and dividends. GMO forecasts that run-of-the-mill U.S. large cap stocks will rise a mere 2.3 per cent on average over the next seven years.
GMO and Mr. Grantham are definitely worth paying attention to. We've highlighted some of Mr. Grantham's views in this space before - including his March 10 argument that investors should put money into the stock market when they are terrified. That was a brave, bullish call that arrived just four days after the S&P 500 fell to its lowest point in the dramatic bear-market selloff.
We look forward to Mr. Grantham's next market commentary.