Aurum Wealth Management Blog

Stock Gap

The Emerging Gap

Despite the high stock prices and a great run in bond prices, investors can hardly be described as exuberant.  Perhaps it is because they look at the investment landscape and do not see much that they like.

Bond yields fell from 15.75% in 1981 to 1.51% today (see below).

By definition, this yield is the expected return on a risk-free 10-year Treasury bond held to maturity.  It is tough to get excited about these yields as well as meeting financial planning objectives.

It is easy to argue that stocks are priced above fair value.  Price-to-sales, price-to-earnings, price-to-cash flow – all traditional ways to measure relative value – are well above their historical medians.

After looking at these ideas, people are throwing up their hands and asking, “what is the alternative?”

We look at the world a little differently.  The first rule of investing?  Buy low, sell high.  Where have prices been low for a while?  It is emerging markets.

Historically, there are 5 to 7 year cycles where emerging markets and developed markets take turns leading. The U.S. won the ebb and flow recently.  The S&P 500 dramatically outperformed emerging markets by 98% in the last five years.

Signs of a change in this trend are evident.

As has happened in most cycles, the U.S. dollar peaked right around the first interest rate hike.  One of the largest detractors from returns over the last few years for emerging markets has actually been their currencies, rather than just share prices.  Currency markets have turned around since February of 2016.

Prices bottomed at 10% lower than in the 2002 bear market, making them a great value 14 years later.

Earnings are also turning the corner, with the fastest six-month growth rate since 2011.

Finally, inflation is coming under control.  In Brazil, inflation was at 10.7% just a year ago and it has since fallen to 8.7%.  India also stabilized its inflation rate in the 5 to 6% range.  Price stability is an important attribute for countries to display for investors.

So what are the alternatives?  While U.S. stocks prices are high, our favorite stocks are in emerging markets. With lower valuations on both share prices and currencies, emerging market equities look appealing.  This is apparent as emerging markets outperformed the U.S. by 8% in 2016.  Considering the strong demographic and productivity trends, along with lower overall debt levels compared to developed markets, emerging markets have many tailwinds.

This material is based on public information as of the specified date, and may be stale thereafter. Aurum Wealth Management Group and/or Aurum Advisory Services has no obligation to provide updated information on the securities or information mentioned herein. Actual events may differ from those assumed and changes to any assumptions may have a material impact on any projections or estimates.

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