Jeremy Grantham And A Low-Growth World

In my piece on the Four Percent Rule, I talked about Jeremy Grantham's November 2012 essay, "On the Road to Zero Growth[1. Available from the "Jeremy Grantham's Letters and Articles" section of the GMO website, but only after you register. Registration is free.]. In that piece I listed some of the marvelous recommendations Grantham has received from the likes of Bogle and Bernstein.

Mr. Grantham forecasted that GDP growth for the US is going to be about 1.4% a year, or 0.9% adjusted for inflation. (Specifically, he forecasts 0.9% a year through 2030, decreasing to 0.4% from 2030 to 2050.) This is in contrast with the greater than 3% growth rate we've had for more than 100 years.

I lamented that Grantham did not discuss the investment implications of this low-growth forecast, instead promising it for a future newsletter. Well, Grantham has delivered in his latest, titled, "Investing in a Low-Growth World."

I was concerned that a lower-growth forecast for GDP would result (if it was accurate) in lower investment returns. But I pointed out that Bernstein, in Chapter 4 of Investor's Manifesto, said investment returns are often the opposite of those for a country as a whole -- "high grade" countries often have mediocre results, and mediocre[2. Sorry, Great Britain.] often have spectacular results.

Grantham backs up this view, showing that there is a mild negative correlation between GDP growth and stock market returns. Grantham and his company, GMO, have gone back 100 years for developed and emerging markets and have confirmed the same negative correlation.

All this means is that we don't really have to worry about Grantham's prediction, at least through the narrow lens of picking investment vehicles and portfolio allocation.