After weeks of struggling, global stocks stabilized last week. However, market volatility remains elevated. Looking at realized returns over the past month accessible via Bloomberg data, annualized volatility on the S&P 500 Index is above 30 percent, triple its early August level.
Looking forward, the bumpy ride in the U.S. is likely to continue, given the persistence of several factors, including a pending interest rate hike by the Federal Reserve (Fed) and expensive U.S. stock valuations. Without the tailwind of easier money, U.S. equities will need to get by on earnings growth, of which there hasn’t been much lately, rather than monetary policy-induced multiple expansion.
But while the outlook for U.S. stocks may be muted, I do see potential opportunities in other parts of the world, as I write in my new weekly commentary, “More Volatility on U.S. Horizon Has Sights Turning to Asia.” In particular, Asian stocks, both in Japan and in emerging markets (EMs), look attractive right now relative to other regions.
Two Potential Opportunities in Asia
Last week, Japanese stocks, as measured by the Nikkei 225 stock index, enjoyed their biggest one-day advance since 2008. Investors were encouraged by Prime Minister Abe’s pledge to further lower the corporate tax rate. Although implementation of the so-called “third arrow” of Abe’s reforms has been mixed, Japanese corporate profitability continues to improve. The return-on-equity (ROE) for Toyko Stock Price Index (TOPIX) stocks was 8.6 percent in August, up roughly a half point from a year ago, as data accessible via Bloomberg shows. As such, investors may want to consider Japanese equities.