Markets will crash hard over the next six to 24 months, and investors should buy up as much emerging market equity as they can stomach to ride out a developed world decline.
That is the cataclysmic warning Jeremy Grantham has kicked off 2018 with in his first note of the year, entitled ‘Bracing yourself for a possible near-term melt-up (a very personal view)’.
In the 13-page tract, the GMO founder and market veteran looked into whether a late bubble is beginning and concluded that heightened caution is needed.
Summarising his views, Grantham said there was a more than 50% chance of a blow-up or end-phase bubble emerging by 2020, and it could come as early as the summer of 2018.
‘If there is a melt-up, then the odds of subsequent bubble break or melt-down are very, very high, i.e. over 90%,’ he said. ‘If there is a market decline following a melt-up, it is quite likely a decline of some 50%.
‘If such a decline takes place, I believe the market is very likely to bounce back up way over the pre-1998 level of 15x, but likely a bit below the average trend of the last 20 years, as the trend slowly works its way back toward the old normal on my “Not with a Bang but a Whimper” flight path.’
Therefore, Grantham said, investors needed to brace themselves now and he suggested adding heavily to non-developed markets. ‘What I would own is as much emerging market equity as your career or business risk can tolerate, and some EAFE. I believe each of these, especially emerging, has more potential than most think.’
Addressing those looking to possibly make money during a downturn, Grantham said purchasing high-momentum US stocks and some ‘obvious candidates’ in China would suffice. ‘In previous great bubbles we have ended with sensational gains, both in speed and extent, from a decreasing number of favourites.
‘This is the best possible hedge against the underperformance you will suffer if invested in a sensible relative-value portfolio in the event of a melt-up.’
Grantham said investors should be ready to reduce equity exposure in general if a melt-up-led rally occurs and then he suggested ‘sitting tight and ignoring all advice, except for an overweighting of emerging’.
To read the note in its entirety please click here.