Valuation Opportunities in 2015

EM high-dividend stocks are currently the cheapest part of global equity markets on a dividend yield and P/E ratio basis. But these stocks have high sensitivity to China’s growth rates and oil prices—two unknowns entering 2015. If oil prices rebound, I believe the EM high-dividend payers will be the biggest beneficiaries.

R.H.: While I would tend to agree with Luciano and Jeremy that valuations across most equity markets are largely more attractive than many fixed income markets, the need for portfolio balance remains. Given our expectation about the strengthening domestic economy, the recent backup in credit spreads creates selective opportunities in the corporate bond markets. The underperformance of high-yield relative to investment-grade corporates and Treasuries has been particularly pronounced this year. Energy-related credits have been distinctly punished. Greater stability in energy prices would create tactical opportunities, particularly in energy issuers that are traditionally cash rich.

EM corporate debt is another long-term opportunity, although it too is experiencing near-term headwinds. In Q1 2015, ongoing concerns about the path of the Federal Reserve’s transition and perennial concerns about a Chinese hard landing are likely to be debated. Still, with spreads at their widest levels in the last two years and all in yields in the mid-5%, the largely investment-grade sector provides attractive potential going forward.

¹Exxon Mobil had 2.93% weight in WT Dividend Index, 5.52% weight in WT Dividend Growth Index, 5.13% weight in WT Equity Income Index and 3.25% weight in WT Earnings Index as of 12/26/14.
²Chevron Corp. had 2.08% weight in WT Dividend Index, 4.18% weight in WT Equity Income Index and 1.91% weight in WT Earnings Index as of 12/26/14.
³ConocoPhillips Co. had 0.93% weight in WT Dividend Index, 1.87% weight in WT Equity Income Index and 0.67% weight in WT Earnings Index as of 12/26/14.