Jeremy Grantham on Equities

We just posted an article from Bill Gross discussing bond rates and economic growth. On the equity front is the view of Jeremy Grantham, chairman of GMO, and one of the most prescient investors out there. His Q3 newsletter can be downloaded here.

Corporate ex-fi nancials profi t margins remain above average and, if I am right about the coming seven lean years, we will soon enough look back nostalgically at such high profits. Price/earnings ratios, adjusted for even normal margins, are also signifi cantly above fair value after the rally. Fair value on the S&P is now about 860 (fair value has declined steadily as the accounting smoke clears from the wreckage and there are still, perhaps, some smoldering embers). This places today’s market (October 19) at almost 25% overpriced, and on a seven-year horizon would move our normal forecast of 5.7% real down by more than 3% a year. Doesn’t it seem odd that we would be measurably overpriced once again, given that we face a seven- year future that almost everyone agrees will be tougher than normal? Major imbalances are unlikely to be quick or easy to work through. For example, we must eventually consume less, pay down debt, and realign our lives to being less capital-rich.

So the common theme amongst both men seems to be in large part that the de-leveraging process is likely to continue and that asset prices are still too high in many regards.

That moves the focus to commercial real estate. The conclusion that can be drawn by both Bill and Jeremy’s analysis is that investor capital chasing real estate needs to focus on areas where there is a concentration of companies that have that qualitative edge, that is, companies which have low amounts of debt, and stable cash flows. Technology is one such sector and Silicon Valley is one such place.

One of the problems we face though, is that while many of our companies may have a qualitative edge, most of our buildings don’t!

[via Business Insider]

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