Jeremy Grantham on the Next Big Investment Drivers

In a recent interview with Wealth, the founder of management firm GMO shared his insights on how the market has changed and where opportunities are going forward.

Between 1935 and 2000, says Grantham, the market was “orderly” and experienced “mean reversion,” but it has since become more complicated. “Since 1998, price-earnings ratios have averaged 60 percent higher than the prior 50 years, and profit margins have averaged 20 to 30 percent higher. That’s a powerful double whammy,” he says.

Grantham says that while the current market “doesn’t feel like a bubble,” we are “climbing the wall of worry.” He believes that valuations have risen, but not to the point of euphoria, due to low rates, low inflation and high profit margins.

Going forward, Grantham sees big change in the investment world coming from climate change and resource limits. “We have grown so far and fast,” he says, “and our population is so big, that we have chewed up safety margins.”

As far as investment opportunities, Grantham says that in 10 years fossil fuels will be more expensive and there will be a carbon tax. In 20 years, he says, electric cars will “displace internal combustion engines” adding that emerging markets are “substantially discounted” and offer opportunities.

Regarding the outlook for financial advisors, Grantham says, “They have sold too many things with high fees instead of index products. The only reason not to index is if you have a special skill in portfolio management. There is nothing more useless than a mediocre investment advisor.”