Where are the asset class investment opportunities?
The chart illustrates the effect of current valuation on expected return over the next five years. Buying undervalued assets results in positive valuation returns. Buying overvalued assets results in negative valuation returns.
Valuation comments 5-31-18
Equities
- China benefitted from recent MSCI announcement to include more local A shares in the Emerging Market Index – more overvalued
- Italy – fears of Italy leaving the Eurozone (dues to populist anti-Eurozone leaders taking power) caused bonds spreads in Italy to reach 2013 Euro-crisis levels, before coming down from their highs a day later. Euro weakening contributing to dollar-based valuation for Italy getting cheaper.
- US small and large moved higher – extending overvaluations
- Turkey getting cheaper with weaker currency and equity market
- Peripheral European markets continue to offer some of the best undervalued opportunities in the world – as European growth stays on track and the ECB eventually normalizes monetary policy.
Bonds
- Treasury yields stabilizing at recently elevated levels – all US bond categories remain overvalued as upward yield pressure continues to be brought by the Fed unwinding its balance sheet
- High and low quality spreads continue to reflect insufficient compensation for deteriorating credit quality – a late cycle credit phenomenon that has hurt credit investors recently.
- Short end of yield curves globally and non-US currencies offer the best valuation opportunities among bonds.
Currencies
- Hawkish sounding Fed combined with recently softer European growth numbers and a political fears has caused the dollar to reverse its 2018 weak start in the last month and half.
- Improved growth in Europe is expected to bring Euro appreciation along with it.
Oil and gold
- Oil and gold prices are down from their recent highs
- Both remain overvalued by our measures
