Jeremy Grantham says these are the only 2 asset classes that will generate a positive return in the next 7 years

• Jeremy Grantham expects just two asset classes to generate positive returns in the next seven years.
• The bearish investor expects US large cap and small cap stocks to generate annual real returns of negative 7% through 2028.
• "We have concentrated our exposure to non-U.S. Value stocks globally," Grantham said.
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Consistently bearish investor Jeremy Grantham sees no refuge for US stocks over the next seven years, according to his firm's asset class forecast.

GMO, the investment firm founded by Grantham in 1977, said in a note this week that it expects only two asset classes to generate positive real returns through 2028: emerging market stocks, and emerging market value stocks.

Those two asset classes could generate annual real returns of 2% and 5%, respectively, through 2028, according to the forecast. Meanwhile, GMO expects US large and small cap stocks, international large and small cap stocks, and various bond sectors to generate losses for investors.

To combat the bleak outlook for returns amid a period of rising inflation and interest rates, Grantham recommends investors "avoid US equities and emphasize the value stocks of emerging markets and several cheaper developed countries, most notably Japan," according to a Thursday note. Grantham also suggests holding some cash for "flexibility."

Ultimately, Grantham sees much more value in overseas stocks than he does in the US. The storied investor said the US stock market could crash as much as 45% from current levels, with the S&P 500 dropping to around 2,500.

The data backs up that view, based on forward price-to-earnings ratios from Yardeni Research. The S&P 500 currently trades at a forward P/E multiple of about 21x, while emerging markets and international developed stocks have a forward P/E multiple of only 15x and 12.5x.

But US stocks' premium to overseas stocks has been persistent since the recovery from the Great Financial Crisis in 2008. Whether rising inflation and higher interest rates is able to fuel a sustainable rotation out of the US and into international stocks remains to be seen.

Year-to-date, the S&P 500 is down about 5%, while emerging markets are up about 2% and international stocks are down only 1% over the same time period.

"To us, these stocks look very cheap relative to the U.S. and in the case of Emerging Markets and Japan Value, particularly Japanese Small Value, they are attractive in absolute terms as well," Grantham said.