Most importantly, valuations look more reasonable when you take a global perspective. The United States appears the most expensive of the major markets. CAPE valuations are much closer to average for other equity markets. While none of the other markets, with the possible exception of Japan, are at a particularly cheap level, valuations look like much less of an impediment than they are in the United States.
To be sure, either an exogenous shock or a sharp spike in interest rates would change the fundamentals and probably lead to a sharp correction, if not an outright bear market. However, I don’t expect either to occur. In fact, I expect equity markets to finish 2014 modestly higher.
But while I don’t foresee a market correction in the near term, there are a number of areas of the equity market that look overvalued and toward which investors will want to exercise caution, including growth stocks – particularly in the biotech and social media sectors – and U.S. small caps.
At the same time, there are pockets of relative value that investors may want to raise exposure to, notably the Japanese market, U.S. value stocks and, to a lesser extent, European and emerging market equities.
Sources: BlackRock, Bloomberg
Russ Koesterich, CFA, is the Chief Investment Strategist for BlackRock and iShares Chief Global Investment Strategist. He is a regular contributor to The Blog and you can find more of his posts here.
International investing involves risks, including risks related to foreign currency, limited liquidity, less government regulation and the possibility of substantial volatility due to adverse political, economic or other developments. These risks often are heightened for investments in emerging/ developing markets or in concentrations of single countries.