So, while I still prefer stocks over the alternatives, I’m an advocate of a value bias. In other words, I suggest investors consider emphasizing select market segments that offer good relative value and potential downside protection.
Where can one find this value? As I write in my latest weekly commentary, I’d suggest focusing on two market segments.
U.S. large- and mega-cap stocks. U.S. large- and mega-cap names have outperformed small caps by roughly 6% year-to-date. But despite lagging large caps this year, small caps are actually the more expensive asset class now. The reason? Small-cap earnings have seen weaker growth relative to that of large caps, meaning investors in small caps are paying more per dollar of earnings.
Market Realist – Large caps have outperformed small caps this year as evidenced by the following graph. The year-to-date (or YTD) returns of the S&P 500 (SPY) stand at 7.93%. On the other hand, the S&P Small Cap 600 has yielded returns of 0.49%.
An illustration of this point: the small-cap Russell 2000 Index (IWM) now trades at more than 26x current earnings, higher than the 16.5x current earnings that the large-cap S&P 500 index is currently trading at.
Emerging market stocks. Outside of the United States, investors, particularly those with little emerging market (or EM) exposure, should take another look at EM stocks. Since their April lows, EM stocks have modestly outperformed developed markets, as measured by the performance of their respective MSCI indices, and inflows into EMs continue. For the week ended July 9, according to Citi Investment Research data, EM equities, garnered another $1.4 billion.
Market Realist – The following graph indicates that Emerging Markets, as tracked by the iShares MSCI Emerging Markets ETF (EEM), have been doing better than their developed counterparts since April, 2014. In fact, the S&P Emerging Markets Core outperformed the S&P 500(SPY) by garnering a return of 10.2% YTD against the S&P 500’s 7.3% return.
What’s behind the inflows? Stabilization in China (FXI) and other EM economies (EEM) is providing some comfort to EM bargain hunters. Further helping sentiment is a shift toward a more dovish stance by some EM central banks, after an earlier round of tightening had ignited growth concerns. Finally, if nothing else, I read the EM inflows as a sign of investor awareness that stocks in the developed world are looking pricey.
To be sure, these aren’t the only market segments offering good value, but they’re ones many investors overlook.
Sources: BlackRock, Bloomberg, Citi Investment Research
Russ Koesterich, CFA, is the Chief Investment Strategist for BlackRock and iShares Chief Global Investment Strategist.
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.