GMO’s Inker Sees Losses for Stocks in Coming Seven Years

U.S. stocks will decline over the next seven years after almost tripling from their 2009 lows because they are overvalued, said Ben Inker, head of global asset allocation at investment firm Grantham Mayo Van Otterloo & Co.

The decline will happen either through a “quick bear market or a longer period of more of less flat returns,” Inker said in a letter released yesterday. Stock prices may still rise 20 percent to 30 percent over the next year or two before collapsing, Jeremy Grantham, the Boston-based money manager’s chief investment strategist, wrote in the same letter.

“We will have the third in the series of serious market busts since 1999,” wrote Grantham, who correctly predicted in 2000 that stocks would lose ground in the next decade. “And we the people, of course, will get what we deserve.”

Stocks have been pushed to record highs in three rounds of asset purchases by the Federal Reserve, which have forced investors into riskier assets such as equities. The Dow Jones Industrial Average exceeded 16,000 for the first time yesterday and gained 22 percent this year, and the S&P 500 Index climbed 26 percent.

BlackRock Inc. (BLK) Chief Executive Laurence D. Fink said this month that stocks may decline as much as 15 percent because of political risks in China, Japan, France and the U.S. New York-based BlackRock is the world’s largest money manager with $4.1 trillion in assets.

Grantham’s Prediction

Grantham, 75, is best known for his prediction in 2000 that stocks would decline in the next decade. The benchmark index lost 1 percent a year in the 10 years ended Dec. 31, 2009, according to data compiled by Bloomberg.

Grantham yesterday said that prudent investors should already be reducing their equity bets and their risk level in general. “Be risky and you’ll probably make some more money, but you may be bushwhacked and, if you are, your excuses will look thin,” he said.

Inker said the fair value of the S&P 500 Index (SPX) is 1,100. The index closed yesterday at 1,791.53. He said the expected return on the index over the next seven years was a loss of 1.3 percent annually after adjusting for inflation. For the broader Wilshire 5000, he predicted an adjusted annualized loss of 2 percent.

“The U.S. stock market is trading at levels that do not seem capable of supporting the type of returns that investors have gotten used to receiving from equities,” Inker wrote.

Grantham Mayo Van Otterloo managed $112 billion as of Sept. 30, according to its website.

To contact the reporter on this story: Charles Stein in Boston at cstein4@blsoomberg.net

To contact the editor responsible for this story: Christian Baumgaertel at cbaumgaertel@bloomberg.net

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