Europe is now discounting a lot of bad news. European equities are now trading at levels that suggest investors are discounting another recession; the dividend on the DAX Index is at roughly four times the level of German Bund yields. While eurozone stocks will need the support of some earnings growth to move forward, this will not be difficult in light of very modest expectations.
Japan looks cheap, and there is a catalyst. I continue to see opportunities in Japanese equities, which benefit not only from very inexpensive valuations but also a reallocation trend to domestic stocks from Japanese pension funds. Just this week the GPIF, the world’s largest pension fund, suggested that they would lift their domestic equity allocation.
Stick with U.S. large caps and high yield. Within the United States, I recognize opportunities, particularly in large cap, cyclical names. On the fixed income side, high yield now represents an attractive option given recent spread widening.
To be sure, the relative value offered varies segment by segment, and you can read more on my specific country and segment outlooks in my latest Investment Directions monthly market outlook.
Looking forward, financial markets remain vulnerable, particularly if we see a further tightening of monetary conditions because of a stronger U.S. dollar. For now, however, I view the recent volatility upsurge as an indication of markets returning to normal after several years of investor complacency and uncommonly low volatility.
Source: BlackRock research.
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.