Investing legend Jeremy Grantham braces for 'cataclysmic decline' in stocks and shares a strategy for 'bonanza payoffs'

• Jeremy Grantham said a stock market bubble and economic decline could be coming.
• Grantham cited falling fertility rates, the climate crisis, and overvalued markets as concerns.
• He advises investing in green tech, sustainable resources, and efficient industry solutions.

While the veteran investor Jeremy Grantham hasn't been running a portfolio for 15 years, he still monitors major themes that he thinks are important long term yet underrated. It's a task, he says, that requires thinking outside the box.

In a Rosenberg Research webinar on Tuesday, the mood felt almost apocalyptic as Grantham ran through the major issues the world is facing. Among them is a decline in population growth due to falling fertility rates, especially in developed countries such as Japan and South Korea, as well as in China — a trend that will eventually likely hurt productivity. He also cited the climate crisis and its impacts on societies and industries.

He expressed his long-standing concern that the US stock market is too expensive and in a bubble that could soon burst. Grantham defines a bubble in technical terms, referring to it as a two-sigma event, which means market values that are two standard deviations away from the mean. This is something that should statistically occur once every 44 years, he said, but in reality has occurred every 35. He reviewed almost every asset class, including commodities, bonds, housing, and even India's stock market, to determine his view on how overvalued parts of the market are and found many outliers.

But he acknowledged that he couldn't predict when this bubble would burst. Some events could move to three sigmas before they revert, he said. In December 2021, as valuations peaked, Grantham said that the stock market showed all the signs of an imminent short-term collapse followed by a bear market. But in November 2022, ChatGPT was publicly introduced, and because of its disruptive nature, it attracted a lot of money, he said.

"It may go up another year, and this is why, as I say, you can't make this a commercial strategy," Grantham said of trying to time the market. "But in terms of long-term intellectual outcomes, we can rest assured that pretty much this will be a dismal point to invest and highly likely to be a fairly cataclysmic decline in the not-too-distant future."

He compared this point in time to the dot-com bubble, when the internet created a big buzz and drew in a lot of investor cash before tech stocks crashed. These included Amazon, which lost 92% of its value before coming back as a monster company, he said. He added that artificial intelligence could be bigger and more important than the internet but that it didn't mean there wouldn't be big losses along the way.

While Grantham is credited with calling the dot-com bubble and 2008 financial crisis, his more recent bearish predictions have not yet played out. In March 2023, and again in a December 2023 interview with Business Insider, he predicted that stocks could fall as much as 50%. The S&P 500 has advanced nearly 50% since then.

Investing without fighting the bull or the bear

The good news is that at this time, all the attractive investment opportunities are logical and obvious if investors focus on finding solutions that would bring efficiency and sustainability to industries, he said.

For example, anything that can improve the efficiency of growing food is likely a good bet. Regarding energy, companies and commodities that can help replace fossil fuels, such as green, geothermal, or fusion energy, are also promising areas to seek investment opportunities in.

As for the decline in population growth, Grantham suggested considering sectors such as fertility clinics.

"This is the kind of thing we try and do at the Grantham Foundation, where a third of our money is in green tech," Grantham said. "We try and look ahead, imagine what the bottlenecks will be and address them. And we are willing, because we're mission-driven, to invest in things that don't work as long as they have the potential to change the game."

There are good opportunities that can be found in natural resources, too, he said. For example, lithium isn't as needed because an electric vehicle can run on a sodium-based battery, a cheaper and more widely available raw material in the Earth's crust. Another example is cobalt, which mostly comes from Congo. The process of its extraction is controversial as it has been embroiled in human rights issues. It's also fairly scarce. Cobalt can be replaced with aluminum and iron ore, Grantham said.

He also suggested seeking out materials that could replace cement, concrete, and steel to build housing more effectively because they burden the environment and have a huge carbon footprint.

"We can find replacements, and we will, and they're all areas that will be bonanza payoffs if they work," Grantham said.

While the world has lived through some big shocks, such as the oil crisis of the 1970s and the financial crash, Grantham believes we're entering an era with many more frequent shocks that will include booms, busts, and shortages in commodities caused by the transition to clean energy. This would mean investors should seek out companies with resilient balance sheets to navigate the coming changes by looking for players that have wide profit margins without carrying heavy debt or leveraging.