Grantham sees the downturn in the stock market as far from over
The investor owns defensive stocks from the pharmaceutical and consumer sectors
Banks could also benefit from rising interest rates
Jeremy Grantham has become a billionaire as the founder of the respected investment group Grantham, Mayo, Van Otterloo & Co. (GMO). The Brit regularly comments on the market situation. This time he is particularly drastic with his forecasts: The stock market situation in 2022 reminds him of the year 2000. Similar to the bursting of the dot-com bubble, Grantham expects a tough stock market in the coming years. But there are stocks that could escape the downward spiral and should deliver stable returns – Grantham holds three prominent stocks in its portfolio.
Grantham expects the S&P 500 to fall 40 percent
Hopes that the worst is behind us and that stocks are bottoming out have been fueled for many investors around the world over the past week. At least the most important indices in the USA, Europe and Asia have recovered from their respective lows. So can investors now take a deep breath and boldly buy again? Jeremy Grantham strongly advises against this – the markets still have considerable downside potential. Grantham’s prognosis: “Recently we were down 19.9 percent on the S&P 500 and down 27 percent on the NASDAQ. At a minimum, we’re probably going to double that. If we were unlucky – which is quite possible – we would go through three such stages.” , he said in an interview with “CNBC”.
Grantham expects recession – but defensive stocks would be less affected
The reason for Grantham’s stock market pessimism is his expectation that the US and other western countries will experience a sharp recession. “We should be in some sort of recession pretty quickly and profit margins have a long way to go after a real peak,” he said. As expected, this will particularly affect economically sensitive and growth-oriented stocks. This divergent development has already become apparent in recent months. Tech titles such as PayPal, Netflix and Meta Platforms suffered particularly from fears of a recession and rising interest rates. By contrast, more stable, more defensive companies such as Nestl, Procter & Gamble and energy companies such as Shell and BP were largely able to escape the negative trend of the past few months. Grantham holds three promising stocks in its own portfolio. Which supposedly safe havens are these?
Coca-Cola: Traditional brand with a moat
Coca-Cola is undoubtedly one of the best-known defensive stocks, as it is considered to be particularly resistant to inflation and recession. The brand is present in over 200 countries and territories and even in a weak economic situation, billions of people can still afford their can of Coke. So it’s little wonder that long-term value investors like Warren Buffett have held Coca-Cola stocks in their portfolios for decades. Buffett repeatedly emphasizes the enormous “moat” that the beverage giant’s brand has. Grantham is also convinced of Coca-Cola: According to a 13F filing by the US Securities and Exchange Commission at the end of March, the Briton owned 9.41 million Coca-Cola shares worth 583.5 million US dollars. This investment has recently paid off for Grantham: Coca-Cola shares are up 6.89 percent over the past 12 months (as of June 14, 2022), which represents an impressive outperformance compared to the overall market.
Johnson & Johnson: pharmaceutical manufacturer with stable earnings
Like Coca-Cola, Johnson & Johnson is a traditional Dow Jones stock. Pharmaceutical giant Johnson & Johnson is a global leader in the consumer health, pharmaceuticals and medical device markets. According to “yahoo finance”, the US company has 29 products, each generating sales of more than one billion US dollars. Average earnings growth over the past 20 years has been 8 percent. Due to the indispensability of many J&J products and the enormous pricing power, the pharmaceutical company should be able to cope with a multi-year stagflation phase much better than the overall market. The enormous resilience of Johnson & Johnson is shown by the fact that the US group has been able to increase dividend income without exception over the past 60 years. The dividend yield is currently 2.56 percent, and Johnson & Johnson shares have risen by 2.25 percent over the past twelve months.
US Bancorp: US bank with interest rate fantasy
If you ask stock market experts which sector benefits most from rising interest rates, the answer is usually unanimous: the financial sector. When prime interest rates rise, the banks’ margin between deposit and issue interest increases, insurance companies receive higher returns on their large portfolio of bonds, and reinsurance companies also benefit from the higher interest rate environment. It is therefore only fitting that a bank occupies a large part of Grantham’s portfolio. More precisely, it is the fifth largest US bank, US Bancorp, based in Minneapolis (Minnesota). US Bancorp places a high value on asset quality. In the first quarter, net loan writedowns fell 52 percent year over year. However, banks in general are suffering from weak economic development, which is why bank stocks have fared significantly worse than pharmaceutical and consumer staples companies in recent months. US Bancorp stock has also disappointed over the past 12 months. During that period, it is currently 21.86 percent below zero but could prove to be the long-term winner of rising interest rates around the world.
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