Call #1: Update on good news the market ignored
Last Thursday, the market got hammered, largely due to weak economic data. One of the catalysts for the sell-off was a collapse in the Philadelphia Fed Business Outlook. While the number was unambiguously bad, it is worth remembering that this is a fairly narrow regional index.
While the market was fixating on the Philadelphia Fed Business Outlook, it ignored a much more positive report from the Conference Board. In this case, a national measure of leading economic indicators increased by 0.50%, which was well ahead of expectations and marked the third positive reading in a row. In other words, the market ignored a somewhat positive message in a broader - and arguably more relevant - statistic.
We still expect a weak economy in the third quarter, but most measures continue to suggest that the United States should be able to avoid another severe recession. Right now, the leading indicators are still signaling that the economy should grow at around 2% in the third quarter, roughly in line with expectations.
Call #2: Maintain overweight on Germany, Netherlands and Russia
With the recent market declines in mind, I want to reiterate some of our overweight views, particularly around European equities. Given the sell-off in recent weeks, many of the Northern European countries I’ve been advocating are now looking very cheap. In particular, I would emphasize Germany (potential iShares solution - EWG) and the Netherlands (potential iShares solution - EWN). Both countries are trading for slightly below book value and for less than 8x next year’s earnings.
For more aggressive investors, one other idea to reiterate is Russia (potential iShares solution - ERUS). Russia has been particularly hard hit in recent weeks, with the market down roughly 20% in August. As a result, Russian stocks are now trading for under 5x next year’s earnings. The only markets in Europe that are cheaper are frontier markets like Ukraine and Cyprus.
Despite the global economic woes and Russia’s exposure to declining commodity prices, it is worth pointing out that Russia’s economy is holding up well. Russia scores well against other countries on leading indicators, it has little debt and core inflation is stabilizing. While this is a volatile market, for investors looking to increase emerging market exposure, Russian fundamentals are stable and the market has become exceptionally cheap. Again, ERUS is a possible iShares solution.
Disclosure: Author is long EWG and ERUS.
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.