Jeremy Granthamco-founder of GMO and Wall Street veteran, has identified four areas of the stock market that he believes are worth investing in, despite concerns about a potential bubble.
What happened: In a note on Monday, Grantham highlighted the risks of an AI-fueled bubble in the stock market. However, she also highlighted some areas that she believes are still attractive for investing, Business Insider reported.
Grantham suggested that quality US stocks, resource stocks, climate investments and renewable energy are worth considering for investment, despite the stock market’s overall high valuation.
Quality stocks, characterized by strong balance sheets, solid cash on hand, and low debt burdens, have a history of outperforming the stock market during bear markets and slightly underperforming during bull markets.
“AAA bonds yield about 1% less per year than low-grade bonds – everyone gets that, and always has. In bizarre contrast, AAA equivalents, with their lower risk of failure, lower volatility and simply less risk, have historically offered an additional 0.5% to 1.0% annually over the S&P 500 Index,” Grantham said .
Resource stocks, such as oil and mining companies, offer diversification benefits and are expected to increase in price due to the scarcity of raw materials.
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Grantham also highlighted the potential of climate investment, as governments are increasingly willing to invest in long-term solutions to climate-related disasters.
“I believe climate investments will have above-average revenue growth for the next few decades, albeit with no guarantees about the regularity of that growth,” Grantham said.
Finally, Grantham sees opportunity in renewable energy stocks, which have been significantly affected by the recent rise in interest rates. He believes these stocks are currently undervalued and represent a good investment opportunity.
According to Grantham, these stocks appear to be sufficiently undervalued to justify investment, considering their comparison to the overall market. Currently, the top 20% of US stocks are unusually expensive, sitting in the bottom 10% of their 40-year historical range among the top 1000 stocks. In stark contrast, the cheapest 20% of stocks are in the top 7% of their historical range.
Because matter: The stock market has been a cause for concern as of late, with many experts warning of a potential bubble. However, Grantham’s insights offer a different perspective, highlighting specific areas that could still be profitable.
Earlier this month, Michael Hartnett, Bank of America’s chief investment strategist, noted that the semiconductor rally has surpassed levels seen during the dot-com bubble. This further fueled concerns about a potential market bubble.
However, some analysts, like Douglas Clinton of Deepwater Asset Management, have brushed aside these concerns, highlighting the strong performance of companies like Nvidia as evidence of a healthy market.
On the other hand, Torsten Sløkthe chief economist at Apollo Global Management, has warned of a potential AI bubble, arguing that the current AI bubble is even bigger than the tech bubble of the 1990s.
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