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The Selloff Has Created Opportunities for Investors

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Elsewhere, the MSCI Emerging Markets Index, which has been particularly hard hit, is trading at less than 12x earnings and barely 1.25x book, a level last seen during the lows in early 2009.

The selling has even restored some value to U.S. equities. The S&P 500 is now trading for less than 15x forward earnings, and the Dow Industrials is now selling for barely 13x next year’s earnings.There’s a similar story in credit. Take U.S. high yield, one of the hardest hit segments. The asset class, represented by the Markit iBoxx USD Liquid High Yield Index, has seen spreads relative to Treasuries widen sharply, despite the fact that defaults remain well below historical levels.

The bottom line: While higher volatility is here for the foreseeable future, the selloff has created a number of potential opportunities for investors with longer-term holding periods.

opportunities for investors

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Market Realist – High yield bonds (JNK) slumped along with equities last week. The slump in crude oil prices has hit junk bond yields in a big way. This is primarily because oil and energy companies make up ~15% of total high yield bond market (as tracked by the BAML HY Bond Index). The bleak outlook for energy raises the risk for junk bonds as well. According to data from Bloomberg, the number of oil and gas companies with bond yields above 10% is now 168—more than three times what it was last year. The number of bonds yielding greater than 10% has shot up to 80 in the United States.

The previous graph shows how the credit spreads between Treasuries (IEF) and high yield bonds (HYG) have risen in the past week despite no change in default risks. The recent selloff in global equities has also pulled down the prices of junk bonds, creating value for investors.

opportunities for investors

This second graph shows how emerging markets (VWO), US markets (VTI), and the Eurozone (VGK) all suffered setbacks in the past week. The losses seem to have created buying opportunities for investors looking for value. However, risk-averse investors should stay away from China (FXI), which is likely to remain a source of consternation for investors. The recent easing efforts by the People’s Bank of China haven’t helped improve investor sentiment in the Chinese market.

Though there are new opportunities for investors on the horizon now, investors still need to gear up for the return of volatility (VXX). With the Fed poised to hike rates, an upsurge in volatility looks more than likely.

Read our series on 5 Portfolio Moves for the Second Half of 2015 to understand how investors can position their portfolios for the remaining year.

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