GMO chairman Jeremy Grantham likes lumber, emerging markets and "aberrantly cheap" blue-chip stocks right now —and eschews bonds, which he describes as being "grotesquely" overpriced.
Grantham said that high quality names are cheap and should provide 7.6 percent real return per year.
Grantham advises constructing a portfolio that contains at least 40 percent U.S. blue chips, 20 percent emerging markets and 30 percent blue chips in the Europe, Australia and Far East index (EAFE), with 10 percent to adjust accordingly for personal tastes.
Grantham’s noted that timber has a 7.5 percent forecasted real annual return. He believes the price/earnings ratio of emerging markets will go to a premium when compared to the rest of the world.
U.S. blue chaps, Grantham said at a recent investor conference, are trading at a 17 percent discount to fair value and 55 percent of earnings come from around the world.
Grantham says it takes about 3.5 years for each of the 34 bubbles GMO has identified to run up — and all bubbles reverse.
Grantham believes both the United Kingdom and Australia are in housing bubbles, that debt has nothing to do with growth, and debt has less influence than most think.
Grantham concluded his talk by noting the importance of the upward bias in the third year of the presidential cycle.
The theory that the third year of a president's term in office for some reason usually yields the best returns in the stock market was originally developed by Yale Hirsch, the author of the Stock Trader's Almanac.
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