Be prepared to do your homework and shop around for the types of accounts and investments that fit both your short- and long-term goals. Or you can do both and take a balanced approach, having absolutely safe money now while still giving yourself the opportunity for growth over the long term. Below are a range of investments with varying levels of risk and potential return.
Just like a savings account earning pennies at your brick-and-mortar bank, high-yield online savings accounts are accessible vehicles for your cash. With fewer overhead costs, you can typically earn much higher interest rates at online banks. Plus, you can typically access the money by quickly transferring it to your primary bank or maybe even via an ATM. While high-yield savings accounts are considered safe investments, like CDs, you do run the risk of earning less upon reinvestment due to inflation.
Liquidity: Savings accounts are about as liquid as your money gets. You can add or remove the funds at any time. Certificates of deposit , or CDs , are issued by banks and generally offer a higher interest rate than savings accounts.
These federally insured time deposits have specific maturity dates that can range from several weeks to several years. With a CD, the financial institution pays you interest at regular intervals. Once it matures, you get your original principal back plus any accrued interest. It pays to shop around online for the best rates.
But there are many kinds of CDs to fit your needs , and so you can still take advantage of the higher rates on CDs. Risk: CDs are considered safe investments. However, they do carry reinvestment risk — the risk that when interest rates fall, investors will earn less when they reinvest principal and interest in new CDs with lower rates, as we saw in Money market accounts typically earn higher interest than savings accounts and require higher minimum balances. In exchange for better interest earnings, consumers usually have to accept more restrictions on withdrawals, such as limits on how often you can access your money.
Risk: Inflation is the main threat. If inflation rates exceed the interest rate earned on the account, your purchasing power could be diminished. Liquidity: Money market accounts are considered liquid, especially because they come with the option to write checks from the account. However, federal regulations limit withdrawals to six per month or statement cycle , of which no more than three can be check transactions.
The U. These are some of the safest investments to guarantee against loss of your principal. Treasury bills, or T-bills have a maturity of one year or less and are not technically interest-bearing. They are sold at a discount from their face value, but when they mature, the government pays you full face value.
Treasury notes, or T-notes, are issued in terms of two, three, five, seven and 10 years. Holders earn fixed interest every six months and then face value upon maturity. The price of a T-note may be greater than, less than or equal to the face value of the note, depending on demand. If demand by investors is high, the notes will trade at a premium, which reduces investor return.
Treasury bonds, or T-bonds are issued with year and year maturities, pay interest every six months and face value upon maturity. They are sold at auction throughout the year. The price and yield are determined at auction. Treasury securities are a better option for more advanced investors looking to reduce their risk. Risk: Treasury securities are considered virtually risk-free because they are backed by the full faith and credit of the U.
You can count on getting interest and your principal back at maturity. However, the value of the securities fluctuates, depending on whether interest rates are up or down. In a rising rate environment, existing bonds lose their allure because investors can get a higher return from newly issued bonds. If you try to sell your bond before maturity, you may experience a capital loss.
Treasuries are also subject to inflation pressures. If the interest rate of the security is not as high as inflation, investors lose purchasing power. Because they mature quickly, T-bills may be the safest treasury security investment, as the risk of holding them is not as great as with longer-term T-notes or T-bonds.
Just remember, the shorter your investment, the less your securities will generally return. Liquidity: All Treasury securities are very liquid, but if you sell prior to maturity you may experience gains or losses, depending on the interest rate environment. A T-bill is automatically redeemed at maturity, as is a T-note. When a bond matures, you can redeem it directly with the U.
Treasury if the bond is held there or with a financial institution, such as a bank or broker. Government bond funds are mutual funds that invest in debt securities issued by the U. The funds invest in debt instruments such as T-bills, T-notes, T-bonds and mortgage-backed securities issued by government-sponsored enterprises such as Fannie Mae and Freddie Mac.
These government bond funds are well-suited for the low-risk investor. Risk: Funds that invest in government debt instruments are considered to be among the safest investments because the securities are backed by the full faith and credit of the U.
However, like other mutual funds, the fund itself is not government-backed and is subject to risks like interest rate fluctuations and inflation. If inflation rises, purchasing power can decline. If interest rates rise, prices of existing bonds drop; and if interest rates decline, prices of existing bonds rise. Interest rate risk is greater for long-term bonds. Liquidity: Bond fund shares are highly liquid, but their values fluctuate depending on the interest rate environment.
Small investors can get exposure by buying shares of short-term corporate bond funds. Short-term bonds have an average maturity of one-to-five years, which makes them less susceptible to interest rate fluctuations than intermediate- or long-term. Corporate bond funds can be an excellent choice for investors looking for cash flow, such as retirees, or those who want to reduce their overall portfolio risk but still earn a return. Investment-grade short-term bond funds often reward investors with higher returns than government and municipal bond funds.
But the greater rewards come with added risk. There is always the chance that companies will have their credit rating downgraded or run into financial trouble and default on the bonds. Make sure your fund is made up of high-quality corporate bonds.
Liquidity: You can buy or sell your fund shares every business day. In addition, you can usually reinvest income dividends or make additional investments at any time. Just keep in mind that capital losses are a possibility.
The fund is based on hundreds of the largest American companies, meaning it comprises many of the most successful companies in the world. For example, Berkshire Hathaway and Walmart are two of the most prominent member companies in the index. The fund includes companies from every industry, making it more resilient than many investments. Over time, the index has returned about 10 percent annually.
However, the index has done quite well over time. Buying individual stocks, whether they pay dividends or not, is better-suited for intermediate and advanced investors. But you can buy a group of them in a dividend stock fund and reduce your risk. Risk: As with any stock investments, dividend stocks come with risk. Make sure you invest in companies with a solid history of dividend increases rather than selecting those with the highest current yield.
That could be a sign of upcoming trouble. However, even well-regarded companies can be hit by a crisis, so a good reputation is finally not a protection against the company slashing its dividend or eliminating it entirely. Liquidity: You can buy and sell your fund on any day the market is open, and quarterly payouts, especially if the dividends are paid in cash, are liquid. One of the most undervalued areas of the U. Of the onshore oilfield service stocks, the pressure pumpers have sagged significantly in price.
Pressure pumping is closely tied to drilling rig activity and is used in development of oil fields. After the well is drilled, pumpers mix water, sand and chemicals, then blast it into the reservoir rock so that the hydrocarbons will flow. Aided by technological improvements, producers have exceeded even their own expectations. In the Permian Basin of western Texas, producers have extracted oil faster than the pipeline infrastructure can transport it to Gulf refineries and port terminals.
The Permian Basin, notable for its enormous supply of crude oil and gas, has no near-term answer to these serious transportation bottlenecks. However, the problem should disappear in with the addition of pipeline capacity. Investors, apparently unwilling to wait, have cast aside oil services stocks, especially those with sizable exposure to the Permian Basin.
Meanwhile, oil prices seem well supported. As a recent affirmation of U. Producers will need oil services companies—even the beleaguered pumpers—to develop these newly acquired fields. In capital-intensive industries such as telecommunications, larger company size brings scale economies and cost advantages. China, Japan and South Korea are three of the most attractive mature telecom markets globally.
Companies rewarding shareholders by returning capital, through dividends and share repurchases, are less likely than growth-oriented peers to squander shareholder capital through overpriced acquisitions. It is notable for its high dividend yield of 3. Utility stocks around the world have generally trailed their respective equity market performance over the past year.
In the U. But just look a few years ahead, and the prospects for electric utilities may be considerably brighter than they are today. The global conversion of internal combustion engine vehicles to electric vehicles EVs, including plug-in hybrids will boost the demand for electricity delivered efficiently to public charge points and homes. If large concentrations of EVs were to charge in the same hour, demand could spike to several times the norm, overloading the grid, causing overheating and blackouts.
To avoid this, many electric utilities, especially in countries determined to reduce carbon emissions, will need to increase power utility investments substantially. With new capacity, utilities may find it more efficient and cost-effective to provide power to large industrial customers, possibly operators of autonomous vehicle fleets, where recharging can be centralized rather than scattered across countless garages and parking spots.
Electric utility regulators should allow the utilities to earn a healthy return on grid upgrades, new connections such as new power lines to electrify parking bays , smart architecture, digitization and new peaking capacity. This effort to build infrastructure for a massive global conversion to EVs should benefit electric utilities able to distribute low-cost power incorporating renewables such as solar and wind.
It tracks lithium miners and battery producers and has a fee of 0. Low growth implies an aging population, and aging has its societal costs. Many Americans are struggling to pay for health care, and the Chinese are facing an even bigger tab. This flow of funds should improve conditions and spawn many higher-quality private hospitals. Other reforms include the elimination of unneeded middlemen in drug distribution, as well as prohibiting the markup of drug and medical devices.
Hospitals had become heavily dependent on drug sales to keep the lights on. To supplement their measly salaries, doctors accepted prescription-related bribes from pharmaceutical manufacturers. After a successful pilot program, zero markup of drugs became reality for most hospitals across the country this year.
To complement reforms, the Middle Kingdom boasts a rising supply of young scientific talent, who are paid about a third as much as their peers in the developed world. The standard Chinese corporate income tax rate is 25 percent, but the rate could be reduced to 15 percent for qualified enterprises engaged in industries encouraged by the Chinese government. Indigenous Chinese health-care companies are included in that category.
Top holdings Chevron Corp. Buy high-quality energy. Investor skepticism weighs heavily on the sector, making this one of the more promising areas in this mature bull market. Relative to high-flying technology stocks, the recent performance of energy equities looks abysmal.
The forces of supply and demand dictate the price of semiconductors as well as oil, with the lowest marginal cost producers having a distinct advantage over the competition. Advertising, including the internet, also has a cycle. The last time markets ignored the cyclicality of technology was in the late s, a rough period for the most overvalued stocks.
Investors may be worried about a global glut of crude oil, especially from rising U. The threat of a possible lack of OPEC production discipline also clouds the oil price outlook. On the demand side, the energy industry will not thrive in a recession. Expect at least two more decades of rising demand for crude oil and gas, as electric vehicles will only gradually substitute for gasoline.
Look for companies with productive acreage and experienced management, financial strength, and cyclically low valuations. Top holdings Exxon Mobil Corp. It returned 7. Perhaps the repeated threats by President Trump to cut drug prices have scared investors. The president will likely claim victory for something that is already happening. The large buyers of U. This is evident in data from Express Scripts that show year-on-year price percentage shrinkage in traditional pharmaceuticals and a slowing, mid-single-digit percentage increase for specialty drugs.
Importantly, utilization growth rates are greater than unit cost rises, indicating product efficacy. If the drugs weren't effective, doctors wouldn't prescribe them. Assuming buyers will pay for efficacious drugs, then the prognosis for the more innovative pharmaceutical companies is good. Notably, several of the European drug giants with promising pipelines trade at valuation discounts to the health-care sector and to their own historical averages. These well-managed, shareholder-friendly companies generate plenty of surplus cash to reward investors.
Many of them have dividend yields at least a full percentage point in excess of the global pharmaceutical and biotech industry and well above overall equity market averages. Famously profitable, the best-managed pharmaceutical companies should be able to offset reduced unit prices with volume growth.
While total U. Proposed drug pricing reforms, such as bidding, reimportation, Medicare negotiating prices and value-based pricing either already exist or have serious, likely insurmountable flaws, such as public safety. Even Medicare, the colossus of U. Aging demographics imply increased drug usage over at least the next decade. The most innovative pharmaceutical companies will likely benefit, even as traditional branded drug prices fade.
Those companies are in the top 10 holdings. The ETF has 75 percent allocated to pharma companies, 25 percent of which are based in Switzerland. IRY comes with a fee of 0. India is far. Flying from Los Angeles to Mumbai via Hong Kong takes about 24 hours, several meals, and almost 10, miles. Despite the distance, Causeway has this populous country on our investment radar.
The recent demonetization to encourage a shift from cash to a digital taxable economy should ultimately fuel growth. Rising tax revenues facilitate fiscal spending on roads, bridges, highways, hospitals, etc. Imagine a country with 90 percent of all transactions in cash. Exchange your soon-to-be-obsolete bank notes or they become worthless. A shortage of legal tender has placed severe working-capital constraints on businesses and harmed roughly half the population without a bank account.
Longer term, the formal, taxable economy should prosper, and the central and state governments can proceed with much-needed infrastructure projects. The payment and growth inefficiencies of a cash economy should lessen. Prime Minister Modi's demonetization offers India an opportunity to leapfrog several banking stages, avoiding checks and bank cards and moving directly to digital payments. We believe non-cash transactions should grow 50 percent annually through to and account for 40 percent of payment transactions.
Banks that already have scale in credit and debit cards, point of sale, and mobile banking should see a substantial pickup in market share. It's also a little expensive, with a fee of 0. It rose 3. In this seemingly endless environment of economic stagnation, what will drive revenue and profit growth?
Central banks may be running out of monetary solutions to stimulate credit and demand. These companies, boasting strong balance sheets and modest levels of debt, typically have managements committed to a continuous and inexorable process of cost cutting and increased efficiency. In mobile telephony, especially in Japan, China, and South Korea, several of the largest listed companies have found increasingly ingenious ways to extract above-industry-average returns from the mature telecommunications market.
These companies are typically creating innovative and value-added services, introducing popular data plans and benefiting from supportive local regulations. Even though these companies have valuable proprietary technology, sell-side analysts put some of them in the dinosaur category. But the analysts often take a short-term view. Market pessimism can give investors a chance to buy world-class technology franchises in transition. For example, large enterprise software companies must make a successful transition from an on-premises licensing business model to a cloud-computing subscription-based model.
Semiconductor companies currently expert in mobile wireless technology are making measurable progress to deliver next-generation technology. Look for efficient operations, focused and shareholder-friendly managements, as well as inherent advantages in research and development expertise and resulting defendable intellectual property.
Economic malaise aside, these great companies, albeit often labeled mature and in transition, still trade at valuations that imply the potential for above-market returns. It rose 11 percent for the three months ended Sept. Something interesting is happening in the Land of the Rising Sun. The Japanese equity market has slipped 20 percent from its five-year high, reached last August, reflecting an economy unresponsive to monetary stimulus.
Despite this gloom, many Japanese companies have the financial wherewithal to reward shareholders with dividends. In other words, these dividends should be well covered by earnings, and thanks to the low payout ratios have room to grow. Some of the best-managed companies with generous dividends include Sumitomo Mitsui Financial Group Inc. The year Japanese government bond yield is negative, making generous dividends all the more appealing.
Perhaps the same will happen in Japan. Watanabe, the proverbial Japanese retail investor, wants income. It may make sense to own some of these income-generating, better-quality Japanese stocks before she does. It also shorts—bets against—the yen, and weights stocks by the size of their dividend. It yields 3 percent. Chief investment officer, Sierra Mutual Funds. This year has tested investor resolve like rarely before.
Whether you are looking to diversify or for new avenues of growth, international stocks are the answer. A weakening U. These two countries offer terrific demographics and the ETFs participate in ample exposure to technology companies. Strong growth and favorable industry exposure combine for promising opportunities for investors.
The Federal Reserve has said that it will do whatever it takes, igniting a stampede into stocks. The economic data is awful, but the Fed has proclaimed that the printing presses are rolling and they are ready for a shopping spree. The disconnect presents a perfect storm. The sharp snapback in recent months increases the probability of volatility and painful losses in the future. These are bonds that can be converted into stock at a specific price. Historically, convertibles have offered equity sensitivity on the upside while cushioning downside risk by paying income.
Getting exposure through a mutual fund gives diversification as well as access to potential alpha created by the portfolio manager. We recommend several opportunities in the convertible bond universe. The impact on nearly every asset class available was swift and brutal.
The optimism that defined the start of a new decade quickly cycled to anxiety, denial and outright fear. While cities, states and the U. Panic is not a strategy. Hope is also not a strategy. Maximum financial opportunity coincides with maximum pessimism, according to legendary investor Sir John Templeton.
High-yield corporate bond spreads over comparable maturity U. The fund charges 95 basis points. After a decade of relative underperformance, international stocks are staging a stealth rally and mark our top pick for new money. We see this as promising and recommend investors pay attention to opportunities abroad.
Last year, nothing seemed to move global equities markets more often or with more tenacity than headlines renewing optimism or pessimism around U. The Phase One U. While trade challenges still exist, the needle is moving in the right direction and a resulting rebound in global economic growth would benefit international stocks.
Further, systematic fiscal stimulus overseas is lurking on the horizon. Relative valuations are also low and can therefore offer more upside potential and less downside risk. While geographic diversification is generally a beneficial tactic, we warn against using passive benchmark-hugging exchange-traded funds. International stocks are an asset class where actively managed fund managers can consistently demonstrate alpha, or better risk-adjusted performance relative to a benchmark.
That means there will be more volatility—which could be good or bad. You have to pay up for DINT, as it charges 0. Lower for longer was a phrase coined several years ago as interest rates stayed at historically low levels for longer than nearly anyone had predicted. It may be time to expect lower forever. Here in the U. Except that stocks have far worse downside risk than bonds. Earnings and cash flows are healthy and will support interest and bond payments for the foreseeable future.
Like any investment, though, we recommend using a sell strategy to exit early when trends inevitably turn down. Our quantitative, rules-based approach uses banded moving averages that typically give a sell signal for lower- and medium-volatility asset classes within a few percentage points of a top price.
The U. More daunting is that this relationship in yields has historically signaled negative economic growth in the near future. The confusion in financial markets has, and surely will, contribute to further uncertainty and volatility. Managing volatility, or risk, is one of the few things investors can control. Why EMD? The global economy is growing, albeit at a slower rate than last year at this time, but growing.
EMD also has a lower correlation to more traditional asset classes like stocks or bonds, providing strong diversification. Against a backdrop where U. More return, less risk. The key to successful investing in EMD is to use an actively managed mutual fund.
The performance of any particular developing country can be vastly different—what is impacting Russia can be very different than what is driving Turkey. An active manager can guide a portfolio more effectively than a benchmark that is required to hold the best and the worst securities.
An actively managed fund will also hold hundreds of bonds, allowing far greater diversification than an individual can achieve through an individual portfolio. The fund has broad industry diversification and maturity range, and a 0. After being trounced by growth stocks — such as tech companies — during both the market selloff and subsequent rebound this year, cyclical stocks are starting to have their day.
In recent months, economic data has been exceeding expectations by the largest margin in at least a decade. Economic improvement provides a catalyst for closing a yawning performance gap. When thinking about adding cyclicals, emphasize quality, not deep value. Instead, focus on niche areas with long-term pricing power, such as rails and specialty chemicals. Another way to play the theme is to focus on areas where cyclical and secular growth intersect, such as semiconductors.
The lesson here is to be discerning. A recovering economy supports cyclicals, but emphasize companies with earnings consistency and high profitability. Even as the pandemic subsides, both unemployment and savings are likely to remain elevated, and value investing — where you focus on beaten-down assets seen as relative bargains — is likely to struggle. Value-style investing typically works at the bottom, because investors anticipate a strong recovery on the back of pent-up demand.
But momentum investing — or following an existing market trend — is likely to thrive, as it benefits from the policy reaction to volatility: more liquidity. Historically, rapid growth in liquidity has favored momentum, particularly compared with strategies like value investing. While the long-term impact of the Covid pandemic is hard to predict, it is not difficult to imagine an acceleration in trends that were already evident prior to the crisis: internet commerce, cloud computing, social media and more time and money spent online.
To the extent these segments are more insulated, and in some cases stand to benefit from longer-term structural changes, this may further favor the style. While no hedge works in all circumstances, given the current combination of record central bank stimulus, a rapid and unprecedented drop in economic activity and negative real interest rates, investors should look to increase exposure to gold. After initially surging on foreign demand, the dollar has pulled back into its long-term range.
Gold tends to perform best when the dollar is flat-to-down. Growth expectations are collapsing, and while often viewed as an inflation hedge, gold performs best when investors are worried about too little growth. As an asset class that produces no income, gold typically suffers when real rates are high.
S year real yields are In an environment in which bond yields are close to zero, and decidedly negative after inflation, there is no opportunity cost to holding gold. Two pillars continue to support the economy and markets: central banks and the U. While U. It also suggests that investors consider overweighting U. The biggest factor supporting consumer stocks is a surprisingly healthy household sector. While over-indebted homeowners were at the epicenter of the last recession, things are very different today.
Job growth remains robust and real incomes continue to rise. In fact, real personal consumption has been growing every quarter since the end of Not only are consumer income statements in better shape, balance sheets are cleaner as well. Thanks to low interest rates, not only is debt lower relative to income but the cost of servicing that debt is the lowest in decades. To be sure, there is turmoil below the surface. Not only are spending patterns changing, shopping habits are evolving even faster.
That said, few segments of the global economy look as promising as the one closest to home. For the most part, has been a stellar year for stocks. To the extent there have been episodic bouts of volatility, they have been brief and quickly reversed. That said, the source of the volatility has been fairly consistent: China.
Whether due to the day-to-day vagaries of the trade war or longer-term concerns over growth and decoupling, China has been the most common source of investor angst. Given this dynamic, investing in China seems like an odd call. But as any storm watcher knows, the safest place to be is often in the eye of the storm. Here are three reasons to consider investing in Chinese equities:. Make no mistake, this is a volatile market. However, for investors willing to take some long-term risk, China looks like the rarest of things: a value play with the potential for growth.
It has an expense ratio of 0. It fell about 1. That said, the case for international diversification remains sound, in part because other markets are also producing stellar returns. While not quite keeping pace with the U. For investors under-invested in non-U. While there are challenges, including structurally lower growth, there are several factors favoring European equities: valuation, dividends, low growth expectations, the composition of the index and finally, the European Central Bank ECB.
Europe also scores much better on dividend income. Dividend yields are approximately 3. In contrast, the U. The fortunes of these companies are more tied to global conditions. Finally, there is the ECB. The ECB is likely to extend its stimulus—and potentially its asset-buying program—later this year. As my colleague Rick Rieder has suggested, this may even involve the eventual purchase of equities, as the Bank of Japan has been doing for years.
The market-cap weighted fund offers healthy exposure to the global equity sway that could help growth, and would benefit from European Central Bank stimulus. That said, many market segments outside the U. More specifically, emerging-market EM equities are not only cheap but are also likely to benefit from the current economic environment. While EM looks inexpensive, the stocks can struggle even with modest valuations, as investors were reminded last year.
Often the challenge is U. In contrast, the current environment looks much more supportive. Dollar Index DXY stuck in a range for the past six months. After one of the sharpest rallies in recent memory, EM equities still offer further upside. Among the countries where we see particularly good opportunities, I would highlight China, specifically in internet commerce and other consumer-oriented companies. Even after the recent rebound, the three-month rolling return for the U.
Valuations look even cheaper relative to the broader market. The sector also appears inexpensive compared with the price of oil. When oil prices are lower, the sector trades at a lower valuation compared with the market. In addition to value, there are two other reasons to consider raising the allocation to energy shares. Finally, large integrated energy companies are offering dividend yields north of 4 percent. In a yield-starved world, this looks attractive.
It has good liquidity and a low fee of 0. It has a fee of 0. As many markets started the year at already-full valuations, investors could be forgiven for thinking that there are few bargains left. Interestingly, many Asian equities appear really cheap. For example, as of the end of September, Japanese equities remain the cheapest in the developed world. The current discount is close to the widest since , a period that preceded a three-year, percent rally.
The Asia discount applies to a number of emerging markets as well. South Korean equities remain not only the cheapest in this category, but looking across equities, sovereign debt and credit, they are by some measures the cheapest asset class.
The current valuation represents a 35 percent discount to the rest of the emerging markets, the largest discount since the Asian financial crisis. Historically, many of these markets, especially Korea, have traded at a discount. The same is true for Japan, but while the discount may have been justified in the past, much has changed in recent years. Japan has witnessed a significant improvement in both corporate governance and profitability.
When you factor in Japanese monetary conditions that are still ultra-accommodative, the low equity valuations seem even harder to justify. While trade and the U. As a result, Japan and much of Asia appear to be that increasingly rare find: a bargain. It fell 2. Following a stellar , emerging-market equities are once again on the back foot.
The selling has left many of these markets cheap at a time when economic prospects are improving and the dollar is stabilizing. The former represents a 26 percent discount to developed markets. Currently, the stocks are trading at a 30 percent discount, the largest since the summer of The magnitude of the discount looks odd given that EM economic data is improving relative to expectations. In other words, economic data went from reliably beating expectations to chronically missing estimates.
However, since late June, things have started to improve. EM assets are still vulnerable to tightening U. Outside of the dollar, investors should be concerned about trade. If trade concerns escalate, EM assets are vulnerable. Finally, the notion of EM equities assumes a homogenous asset.
In reality, EM is a heterogeneous collection of countries, with wildly varying fundamentals and valuations. Turkey is not Taiwan, and Brazil is not Poland. For myself, I see the best opportunities and value in EM Asia. While not without risks, this part of the world looks to once again offer some value. It has heavy allocations to China, Taiwan and India, but also includes countries like Malaysia and Indonesia.
It charges 0. Most asset classes are somewhere between reasonable and off-the-charts expensive. At the same time, volatility has returned with a vengeance, and an escalating trade dispute has the potential to disrupt what was supposed to be a year of synchronized growth.
This combination does not immediately suggest adding to one of the riskier asset classes: emerging-market stocks. That said, given cheap valuations, a still-resilient economy and a stable dollar, emerging markets may represent one of the more interesting opportunities in In an environment where valuations have been pushed ever higher by an extended bull market, most emerging-markets countries stand out as cheap. The current discount compares favorably with the year average discount of 15 percent.
A larger discount might be justified, given higher volatility and political uncertainty. Finally, there is the U. To be clear, there are risks. An economic slowdown or a more abrupt tightening of U. However, to the extent that the global expansion continues, emerging markets is the rarest of things in a prolonged bull market: a cheap asset class.
It charges a 0. The past year was, in every sense, as good as it gets. Stocks posted gains of more than 20 percent, with virtually no pullbacks. Given a synchronized global recovery and still-easy financial conditions, is likely to be another year in which stocks beat bonds. For those already heavily invested in U. Cheaper valuations. While the U. This leaves the U. Faster earnings growth. Part of the reason U. More income.
As stocks have risen, dividend yields have fallen. For the first time since the financial crisis, the dividend yield on large-cap stocks is now below the yield available on a 2-year Treasury note. In contrast, the dividend yield on the Euro Stoxx 50 is well above 3 percent. Australian equities yield over 4 percent. Income-oriented investors should ponder the opportunities outside the U. Easier monetary policy. That said, the U. Federal Reserve is ahead of the curve in tightening monetary policy.
Other central banks, notably the Bank of Japan, will be slower to withdraw easy money policies. The ETFs charge 0. The ETFs gained 6. After a stellar back half of , U. As the post-election euphoria faded and everyone faced up to the reality of still modest growth, most investors reverted to old habits: a focus on yield and growth at the expense of value.
Value stocks outperformed their flashier growth cousins in September, and there are several reasons to believe that trend can continue. First, value is cheap. While value stocks are by definition cheaper than growth, today they are much, much cheaper. Since the average ratio between the Russell Value and Russell Growth Indices based on price-to-book has been 0. Currently the ratio is 0.
Value has not been this cheap relative to growth since early In addition to being cheap, for the first time this year value may once again have a catalyst. In contrast, when economic growth is modest, investors are more likely to put a premium on companies that can generate organic earning growth, regardless of the economic climate.
This dynamic helps explain the strong year-to-date rally in technology and other growth stocks. Granted, the economic impact of temporary tax cuts is more a sugar high than structural reform, but you take what you can get. At this point, even a modest boost in near-term growth expectations is arguably enough to shift investor preferences. This creates an opportunity for value. Value is not dead yet. It was down 0. There are times to stretch and take more risk, and there are times when discretion is the better part of valor.
Following a bull market that turned eight years old in March and countless trillions of dollars of central bank asset purchases, few asset classes are obviously cheap. Still, in a world in which interest rates are barely 1 percent, investors can be forgiven for not wanting to stick their spare cash under the mattress. This suggests to me a compromise: finding assets with a respectable yield that will provide downside protection if markets turn south.
This compares favorably with most of the other alternatives, including high-yield, investment-grade and emerging-market debt, and a basket of U. More to the point, following a disastrous period during the financial crisis, preferred stock has become a much less volatile asset class, currently offering the most attractive ratio of yield to volatility of the yield-oriented plays.
Comparing the yield to the three-month trailing volatility of the asset class, you get a ratio of more than 1. In other words, investors are receiving 1. This is significantly higher than any of the alternatives. Some will recall that preferred stocks did not live up to their reputation for low volatility during the financial crisis.
At that time, an index of U. I see much less downside risk today. It is not clear that U. The sector is much better capitalized and run more conservatively than it was 10 years ago. Its 0. Large-cap U. Making matters worse, U. Treasury bond prices look extremely rich after several years of buying by central banks.
In this environment, Asian equities stand out as a relative bargain. In recent years, Japanese stocks have traded at a discount to the U. The Topix index is trading at approximately 1. Japanese profitability has been improving since , thanks to better corporate governance and share buybacks. In addition, Japanese equities offer accounting standards that are strict relative to the U. Finally, to the extent the global economy is likely to modestly accelerate in , Japanese exporters are well positioned to benefit from improving global growth and a firmer economy.
We also see select opportunities in other parts of Asia, including emerging markets. In particular, Indian companies offer an interesting take on emerging markets. It is by far the most popular Japan ETF and charges 0. EEMA charges a fee of 0. Chief investment strategist, Absolute Strategy Research.
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