Bear Markets & Opportunities
|We gave a short presentation yesterday on our framework. In discussing the current conditions we found the response rather negative. Sure, it is the truth and what it indicates is more volatile conditions within equities and risk assets. However, the volatility can create amazing opportunities. It is not a time to hide out or run scared.
In this commentary we want to explore what we see as some possible opportunities in today's market environment—an environment where valuations, market trends, Fed policy, and economic growth all inspire poor market results, at least in the US.
We felt a good exercise would be to analyze each of the four areas of our framework with an eye to the ultimate opportunities that exist today.
Valuations
Valuations are the first component of our framework. In the US valuations are negative because they are in the top decile of historical observations. In other words, US stocks are highly valued, and according to Research Affiliates, are expected to earn nothing over the next 10 years. The All Country World Index (labeled as all equity in the graphic) is expected to return around 3% per year for the next 10 years, on average. This is why valuations are red within our framework, because the expected return is far below the average annual return of the market.
Opportunities do exist according to long-term top down valuations. Emerging markets are currently valued to earn 8% per year over the next 10 years, according to Research Affiliates. The expected returns on emerging markets are significantly above the 0% expected for the US stocks. Therefore, we believe that despite the high values in the US, the emerging markets offer a compelling opportunity.
From a global perspective, Russia, China, and Brazil are some of the lowest valued markets in the world. Russia and Brazil are performing well this year while China is down big. If low valuations suggest higher than average returns going forward, then we should expect Russia, China, and Brazil to generate attractive gains. We will have to wait and see.
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