Thursday, February 12, 2015

Hunting for Global Value (excerpt)

In the bond market, investors are reaching for yield. In some countries, where short-term interest rates are negative, they are reaching for zero. In the equity markets, some investors are scrambling for dividends, as evidenced by the 19.3% y/y increase in the S&P 500 Utilities stock price index. The sector’s forward P/E rose to 18.0 at the end of January from around 10.0 during 2009.

The sector isn’t cheap. Neither is the overall S&P 500, which has a forward P/E of 16.8. Even more expensive are S&P 400 MidCaps (17.6) and S&P 600 SmallCaps (18.3). Global investors are hunting for cheaper stocks than are available in the US. Some of them are in the Eurozone and Japan. While their economies aren’t performing as well as the US economy, their central banks are easing, while the Fed is moving to tighten. That means their currencies may continue to weaken, requiring currency-hedged bets.

At the beginning of February, among the major MSCI indexes, the US was the most expensive, with a forward P/E of 16.9. All of the following were cheaper: Emerging Markets (11.4), Japan (13.7), Germany (14.1), EMU (14.8), Canada (16.6), and UK (15.0). There are some values in the Emerging Markets: Russia (4.4), China (9.5), Brazil (10.3), Turkey (10.6), Indonesia (14.8), South Africa (16.6), India (17.4) and Mexico (17.5). Of course, there are plenty of “value traps” overseas that are cheap for a reason.

Today's Morning Briefing: Hunt for Global Value. (1) The widespread consensus. (2) Opportunities overseas. (3) Dollar-based vs. currency-hedged investors. (4) S&P 500 and Fed’s bond holdings still joined at the hip. (5) Draghi has been Fairy Godfather of EMU stock markets. (6) Abenomics has worked for Japanese stocks. (7) PBOC good for Shanghai-listed stocks. (8) Fundamentals don’t matter as much if central bank is easing. (9) In some countries, fixed-income investors are reaching for zero. (10) The US isn’t cheap. (11) Value traps. (12) Falling earnings. (More for subscribers.)

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