Grantham Says U.S. ‘Blue Chips’ Are Cheapest Stocks

By Sree Vidya Bhaktavatsalam

July 27 (Bloomberg) — Jeremy Grantham, chief investment strategist of Grantham Mayo Van Otterloo & Co., said shares in big U.S. companies are the best values and China’s economy could “come unhinged,” hurting emerging-markets stocks.

“The easy winner of the cheapest equity subcategory contest is still high-quality U.S. blue chips,” Grantham, who oversees about $78 billion, wrote in a quarterly letter posted today on the Boston-based firm’s Web site. “They were really trashed on a relative basis by the second-quarter rally in junk,” he said, without naming any companies he favors.

The Dow Jones Industrial Average of 30 industry-leading U.S. stocks rose 11 percent in the three months ended June 30, while the MSCI Emerging Markets Index jumped 34 percent. Emerging-market equities are “moderately overpriced,” wrote Grantham, 70.

GMO is studying China’s economy to assess its influence on stocks in other emerging markets, Grantham said.

Edward Chancellor, a member of GMO’s asset-allocation team, “strongly suspects that the Chinese economy is dangerously unbalanced and very likely to come unhinged in the next few quarters, surprising the pants off investors,” Grantham wrote.

Chinese stocks have surged to double their low set in 2008 as the government has unveiled a 4 trillion yuan ($585 billion) stimulus plan to revive growth in the world’s third-largest economy.

“Being pro-emerging market yet anti-China is a dilemma for us,” Grantham wrote. “We are working to resolve it.”

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