Chicago - If there was such a thing as a global financial
uncertainty index, it would be soaring to a stratospheric level.
The eurozone crisis still festers, 15 major banks were
recently downgraded by Moody's and the US faces a boatload of political risk
through its year-end of fiscal cliff tax increases.
Markets are being roiled by volatility, and so bonds have
become like caves - refuges from widespread fear.
Welcome to the golden - or rather leaden - age of
"It's a groundhog day effect - it's as if the news is
replaying and the European Union goes around in a tortuous circle," says
Jeremy Grantham, chairperson of GMO, speaking at the Morningstar Investment
Conference in Chicago on June 22.
The positive news that's often being obscured by darker
headlines is that earnings for large US companies are fairly robust, although
Grantham, whose firm manages more than $105bn and is known for being a top
value investor, sees them as "abnormally high" and US stock
valuations as "not cheap".
While Grantham may not be optimistic about short-term market
conditions, he's long advocated high quality stocks and a focus on long-term
resource shortage issues. Even in a skittish time, for the largest corporations
profits usually translate into steady dividend payments.
His firm's GMO Quality III fund, for example, invests in
mostly giant companies like Microsoft, Johnson & Johnson and Apple. The
fund's dividend yield is 2.7%.
Like many market observers, Grantham sees slow to moderate
economic growth over the next seven years. He forecasts that US "high
quality" stocks will grow about 5% over the next years, overshadowed by
emerging markets at nearly 7% and international large companies at 6%.
Running a parallel path with his outlook for stocks is a
growing reality that natural resources aren't keeping pace with the population
growth of the 7 billion souls already on the planet. That forces a long-term
focus on resource allocation and commodities.
To feed everyone, more land, fertilizer and agricultural
productivity is needed.
Grantham has created a chart of a commodity index that
starts in 1900 and shows that there have been "rolling crises of
availability" only broken by a "great paradigm shift" in recent
years in which demand has soared.
"Never has there been such a crushing of an asset class
(commodities) and a rebound to an all-time high," he added at the
How will the world produce more natural fertilizers and
arable land when the supply is finite and food production may be hitting an
"agricultural glass ceiling"?
That answer isn't known but in the interim, Grantham
suggested "thinking favourably about farms, resources, fertilizer and
In this bleak scenario, what should a long-term investor
keep in mind? That the euro crisis and US political logjams will eventually
pass, although not without a heavy dose of sturm und drang or "storm and
There will be opportunities to buy stocks that have what
analysts call wide "moats", that is, they can generate cash and
dividends in even the most trying global situations. Grantham's Quality fund,
for example, is heavily weighted in consumer defensive and healthcare stocks.
A more long-term approach is to buy funds that track an
index of commodities such as the PowerShares DB Agriculture exchange-traded
fund that holds futures contracts in everything from coffee to wheat.
If you want even more specialisation in this sector,
consider the Global X Fertilizers/Potash ETF (exchange-traded fund), which
concentrates on fertilizer companies; or the Market ectors Agribusiness ETF,
which has a broader mix of companies in this sector.
Other considerations include ETFs like the Consumer Staples
Select SPDR fund, Vanguard Consumer Staples ETF or the iShares Consumer Staples
Aside from tweaking your holdings, there's always an
opportunity in the age of uncertainty to lower portfolio risk. Make sure you
adjust your allocations to the human capital opportunity you have.
Are you nearing retirement and heading into a fixed-income
lifestyle? Then your main concern should be cash flow, limiting your expenses
and hedging against inflation with inflation-protected securities and
If you're younger, evaluating your human capital risk also
involves an honest view of how your income will be impacted in coming years.
Are you in an industry or profession that's prone to downsizing or outsourcing?
In recent years, even once-secure government jobs have been disappearing.
Ultimately, it's your ability to generate a sustainable
income and save it that will be the most demanding test in these anxious times.
Remember the best forecast has nothing to do with stocks or
bonds; it's the one that most accurately predicts your ability to weather the
many storms ahead.