Jeremy Grantham says these are the only 2 asset classes that will generate a positive return over the next 7 years

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  • Jeremy Grantham expects only two asset classes to generate positive returns over the next seven years.
  • The bearish investor expects U.S. large and small cap stocks to generate annual real returns of minus 7% through 2028.
  • “We have concentrated our exposure to non-US value stocks globally,” Grantham said.
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Persistently bearish investor Jeremy Grantham sees no safe haven for U.S. stocks over the next seven years, according to his firm’s asset class forecast.

GMO, the investment firm founded by Grantham in 1977, said in a note this week that it expects only two asset classes to generate positive real returns through 2028: emerging market equities. and emerging market value stocks.

These two asset classes could generate real annual returns of 2% and 5%, respectively, until 2028, according to forecasts. Meanwhile, GMO expects US large-cap and small-cap stocks, international large-cap and small-cap stocks and various bond sectors to generate losses for investors.

To combat the bleak outlook for returns in a period of rising inflation and rising interest rates, Grantham recommends investors “steer clear of US equities and focus on emerging market value stocks. markets and several cheaper developed countries, including Japan,” according to a Thursday memo. Grantham also suggests keeping cash for “flexibility”.

Ultimately, Grantham sees far more value in foreign stocks than in the United States. The legendary investor said that the United States stock Exchange could crash as much as 45% from current levels, with the S&P 500 falling to around 2,500.

The data supports this view, based on forward price-earnings ratios from Yardeni Research. The S&P 500 is currently trading at a forward P/E multiple of around 21x, while emerging markets and international developed stocks have a forward P/E multiple of only 15x and 12.5x.

But the premium of U.S. equities over foreign equities has been persistent since the recovery from the Great Financial Crisis of 2008. It remains to be seen whether rising inflation and rising interest rates are capable of fueling a rotation sustainability from US equities to international equities.

Year-to-date, the S&P 500 is down about 5%, while emerging markets are up about 2% and international equities down just 1% over the same period.

“To us, these stocks look very cheap relative to the United States and in the case of emerging markets and Japanese value, especially Japanese small value, they are also attractive in absolute terms,” Grantham said.

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