How will capitalism emerge from COVID-19?
Jeremy Grantham, founder and Long-Term Investment Strategist at GMO, talks to Chris Ralph, Chief Global Strategist at St. James's Place, about emerging market value, widening inequality, and oil's fading prominence.
After more than 40 years of investing success at GMO, what have you learned?
I am constantly amazed by how much of our early success is owed to good fortune. When we were establishing ourselves, it was already clear that the discipline of value investing worked. However, it hadn’t yet become a dominant force in markets. The tools worked but hardly anyone was using them, and the competition that did exist was generally of a lower calibre than what we see today.
So, in the early years, the investment discipline that we deployed was extremely profitable and, with hindsight, relatively easy.
Overall, we were lucky with our timing and we got some big calls right. For example, we got out of Japan before its bubble burst in the late 1980s. We did the same with technology in the late 1990s, doubling down as the bubble inflated. Then in 2007, we anticipated the US housing market would implode and were able to walk clients through that crisis relatively painlessly.
Where do you see value in markets at the moment?
Almost all the value I see currently is in emerging markets. Relative to the US market, emerging world equity has never been cheaper. When considering the value versus growth dynamic, emerging market value stocks have rarely been this attractive. This value will provide great returns over time, but patience may be required.
The investment case for emerging markets isn’t just about valuation, however. It is a broadly diverse universe nowadays. Overall, emerging markets now represent around 60% of global GDP and they are typically growing twice as fast as developed markets. Collectively there is a massive opportunity, with a lot more growth potential on offer than in the developed world.
Is capitalism’s pursuit of growth, at seemingly any cost, a flaw in the system?
Yes, in my view, it is. It is simply unacceptable that today’s great, all-powerful corporations should not be concerned about the societies in which they operate. If capitalism cannot find quite a bit more innate benevolence, I believe we will eventually see social unrest. Benevolence will, in that way, ultimately be forced upon it.
In the 1960s, companies were typically well-behaved. The ratio of CEO pay to that of the average worker stood at less than 40 to one. Japan had a similar ratio back then – indeed Japan’s ratio is still around that level. But in America, the ratio is now almost 300 to one. Japan has managed to strike a better balance, it would seem, between societal values and capitalism, than in the US. power of wind
How well do you think governments have handled the COVID-19 pandemic?
It was obvious in late January that this would become a massive global problem. Once China realised the severity of the situation, it acted decisively and effectively to prevent the spread of the virus. It will re-open with fewer consequences as a result. The rest of the world, meanwhile, watched and hoped – but it was already too late. Every day that passed from early February, to the introduction of more widespread lockdowns in Europe and North America in March, made the predicament worse.
Very few nations have handled this well. And I’m not totally convinced that the policy response has struck quite the right balance between the costs and the benefits of saving each life. I’m not sure what the alternative is, but we are interrupting the education of our children in order to save these lives. Meanwhile, unemployment is off the chart and the failure rate among new businesses will be almost 100%. We have no idea what it will mean to have hundreds of thousands of businesses failing to pay the rent and their staff – just failing. This is a very serious affair which will last, in some respects, forever.
Are there similarities between the pandemic and the climate crisis?
Certainly, there are similarities, but there are also differences. The threat of the virus is immediate, whereas the threat to the climate is in the future. However, the climate crisis has felt increasingly immediate because we are starting to see its influence in the form of floods, heatwaves, droughts and other weather events.
One similarity is, unfortunately, in our ill-preparedness. Every dollar spent in advance ultimately saves millions. Instead, we have been disassembling our preparedness. We have been underfunding our health services and we’ve been in denial over the climate.
Nevertheless, there are many good virologists who have been saying for years that some form of health pandemic was inevitable. Just like a market bubble, just like a credit crisis. And yet we fail to prepare, and we fail to learn the lessons of history.
With respect to the climate, there is no vaccination. We must tool up the system for decarbonisation. If we don’t, we will face multi-trillion-dollar consequences.
Can the private sector help us to solve the climate crisis?
Yes, absolutely. The more I have looked at this, the more I have realised just how profitable almost all of the solutions will be. Some of them already are.
Take wind power, for example. There has been enormous investment over the last decade: the technology is getting better all the time and the cost is heading lower. Last year, we saw the lowest ever bids for offshore wind contracts in the UK, which are expected to deliver unsubsidised energy more cheaply than gas by 2023. Offshore wind will be the best form of new energy for years – but we still need to get more political will behind it, in order to move more quickly and decisively.
Does COVID-19 represent a setback in the fight against the climate crisis?
I fear so, yes, in some respects. We had been picking up serious momentum, so to take a year out to fight the virus is bound to have an impact. However, during this time, we’re already seeing some important reflecting on the big issues of preparedness, societal well-being and reconsidering just how crass some parts of the western capitalist system have become. There’s a lot of this going on, and it’s a necessary undertow to getting more goodwill behind the climate movement.
I am hopeful that, as the virus subsides, we will have a society that is more concerned about its own well-being, which goes hand-in-hand with the issue of climate change. So, we may lose ground in some areas, but gain in others.
Within fund management, are perceptions about environmental, social and governance improving?
I think our industry has been a surprisingly good leader on climate change. We’ve put our best foot forward over the last couple of years.
If something is good for business, good for economics and good for society, it makes no sense fighting the trend. Fund managers don’t have an axe to grind – we just want to make money for our clients.
The problem comes at the corporate level, where there will be pushback in some quarters. In agriculture and oil, you can understand why individual companies will resist change. That makes me nervous as an investor. If these companies roll with the punches, they will probably do ok in the end. If they are in denial about the climate and the need for change, however, this is existential.
As a value investor, do you see value in energy stocks now?
A decade ago, I was discreetly suggesting that people should watch their tail in oil. In the intervening years, I have become a lot less discreet and a lot more vocal about the risks. During this time, the oil sector has gone from accounting for 16% of the S&P 500 index, to about 3% today.
Historically, I’ve argued there are two reasons to avoid oil stocks. The first was ethical – it was, and is, simply the right thing to do. The second was valuation, because I didn’t think you’d make money by owning them.
Today, given what’s happened to the price of oil and oil stocks, I am more agnostic on valuation. But from the perspective of ethics, I still wouldn’t touch them with a ten-foot pole.
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