4. Stocks, particularly international ones, appear reasonably priced relative to their own historical valuations and to cash and bonds.
To be sure, there are certain scenarios that could derail the 2013 rally. These include a prolonged and substantial move over 3% in the 10-year yield, a flare-up of the European sovereign debt crisis and rising tensions throughout the Middle East. But assuming these events don’t occur, the points I cite above should support stocks.
So what does this mean for investors? I continue to believe that investors should consider overweighting equities in their portfolios over the long term. In addition, investors underweight international equities may want to increase their exposure to non-US stocks (including emerging market equities), which look particularly cheap and are already discounting a lot of bad news.
On a price-to-book basis, international developed markets are trading at around a 35% discount to the US market, while emerging markets are trading at an astounding discount of more than 40%. On that note, although last week is a brief snapshot, it’s worth pointing out that while US stocks had a strong week, international markets (including emerging ones) actually outperformed.
Russ Koesterich, CFA, is the iShares Global Chief Investment Strategist.