Call #1: Maintain Overweight Equities, Mega Caps, Germany, the Netherlands & Brazil
Given last week’s extraordinary volatility, my call this week focuses on the overall market today and my take on it. Essentially, I still believe the odds favor slow but positive growth; equities look inexpensive; and volatility appears too high.
As I’ve been discussing for some time, this was always going to be a slow recovery. That said, while I would continue to expect subpar growth, leading indicators aren’t suggesting that we’re heading back into a recession.
For instance, in the year leading up to the 2008 recession, leading economic indicators fell or were flat in 11 out of 12 months. In contrast, during the past year, leading indicators have risen in 11 out of 12 months, including the most recent month.
In short, while an unexpected event (such as a European banking crisis) could easily knock the world back into a recession, growth looks set to continue on a slow-but-positive path in the absence of such an event.
With that in mind, how do stocks look? At their lows last week, global equity markets were trading at around 1.4x book value, close to their 2009 trough valuations. While there are no shortages of headwinds for markets, recent valuations look extreme to me unless one believes that the global economy is going back into another severe recession, another global banking crisis or both. As I don’t see either situation as likely, I advocate being a buyer of equities.
In particular, I continue to like large, quality mega caps, which can be accessed through potential iShares solutions such as IOO, OEF, HDV and DVY. Second, I see good value in much of northern Europe, including in Germany (potential iShares solution: EWG) and in the Netherlands (potential iShares solution: EWN).
Finally, as I highlighted last week, I am also advocating an overweight view for select emerging markets, particularly Brazil (potential iShares solution: EWZ).
Call #2: More on recent market volatility
Now, a bit more on the level of recent market volatility. In May, I noted that market volatility seemed to low. Since then volatility has risen by more than 100%.
Given this big spike, I noted last week that market volatility was too high. As a result, I would now advocate being a seller of volatility and lightening up on fixed-income exposure in order to fund an increased allocation to stocks.
Disclosure: Author is long DVY, EWG and EWZ
Disclaimer: In addition to the normal risks associated with investing, international investments may involve risk of capital loss from unfavorable fluctuation in currency values, from differences in generally accepted accounting principles or from economic or political instability in other nations. Emerging markets involve heightened risks related to the same factors as well as increased volatility and lower trading volume. Securities focusing on a single country and narrowly focused investments may be subject to higher volatility. Bonds and bond funds will decrease in value as interest rates rise.