By John Wasik
CHICAGO, June 25 If there was such a thing
as a global financial uncertainty index, it would be soaring to
a stratospheric level.
The euro zone crisis still festers, 15 major banks were
recently downgraded by Moody's and the U.S. faces a boatload of
political risk through its year-end of fiscal cliff tax
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, chairman of GMO LLC, 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 U.S. companies are fairly
robust, although Grantham, whose firm manages more than $105
billion and is known for being a top value investor, sees them
as "abnormally high" and U.S. 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 Corp, Johnson & Johnson and Apple Inc
. The fund's dividend yield is 2.7 percent.
Like many market observers, Grantham sees slow-to-moderate
economic growth over the next seven years. He forecasts that
U.S. "high-quality" stocks will grow about 5 percent over the
next years, overshadowed by emerging markets at nearly 7 percent
and international large companies at 6 percent.
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
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
favorably about farms, resources, fertilizer and timber."
In this bleak scenario, what should a long-term investor
keep in mind? That the euro crisis and U.S. political logjams
will eventually pass, although not without a heavy dose of sturm
und drang or "storm and stress".
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 specialization in this sector,
consider the Global X Fertilizers/Potash ETF, which
concentrates on fertilizer companies; or the Market Vectors
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 Index fund.
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 annuities.
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.