Top value investor Grantham: resources/GDP squeeze could lead to energy efficiency investment surge

Veteran fund manager says fracking unlikely to offset energy price crunch.

Jeremy Grantham, the renowned value investor, says rising resources costs will squeeze US GDP growth rates down to about 1.5% per annum – less than half its 100-year 3%+ norm – and continue to fuel the rise in commodities prices while leading to serious potential growth in the coming decade of energy efficiency and substitution as an investment theme. In his latest investor report, titled: “On the road to zero growth”, Grantham, Co-founder and Chief Investment Strategist of Boston-based fund manager, Grantham Mayo Van Otterloo (GMO), said he believed a major upshot of his predicted resources/GDP squeeze would be the continued run up of commodities price rises, which started back in 2002. Grantham said resource costs in energy and minerals had been rising “conservatively” at 7% a year since 2000 in a world growing at under 4% and a developed world at under 1.5%. He said the other major effect would be a significant business shift in the next ten years towards capital investment in energy efficiency plays and resource ‘substitution’ such as replacing scarce and expensive metals like copper with aluminium, which is cheaper and has larger reserves. Grantham said product-related energy efficiency including using less material, recycling, energy saving, renewable energy, storage and smart redesigning of life styles could “surprisingly” surge as an investment theme.“One of the most important developments and fortunately, I believe, one of the most likely in the next 10 years, is much cheaper energy storage devices, which, with continued progress in lowering the costs of home solar and improvements in home energy efficiency, would allow us to be off the grid.” He said oil and gas ‘fracking’, which is currently lowering US energy prices, would add to the country’s GDP growth, but he believed the benefit would peak at about 0.5% of GDP addition within five years and be modest over longer periods.
Grantham, a highly respected investor and notable environmentalist, said increasing climate damage, reflected mainly in food prices and flood damage, would increase, but not be severe until 2030 before accelerating to 2050, depending on global responses.
He said: “Our farming weather is being hurt too often – the last three years in a row have been extreme outliers – and we have plenty of other food problems without making it unnecessarily worse. Increasingly severe floods and storms have other high costs. Of the 10 extreme floods in NYC since 1920 three have occurred in the last two and a half years! This September 21st, the Arctic ice had lost 75% of the volume it had on average over the last 30 years. Not 2.3%. 75%!”
Link to Grantham letter