Europe: Stimulus on the Way
Continent-wide, Europe remains troubled. But from the bottom up, we are finding some individual sectors and companies across portions of the region which are attractive. Today, we are closely examining large cap situations particularly in France and Germany. The German market trades at just 12 times forward earnings, considerably less expensive than the US, and opportunities in the industrial, health care and materials sectors look promising.
In a development with potentially far-reaching implications, the European Central Bank announced in early September that it would launch a QE-like program of economic stimulus and interest rate cuts designed to strengthen the region's faltering recovery from the global recession.
The program's impact remains to be seen. But the stubborn reality is that Europe's recovery remains several years behind that of the U.S. -- creating the opportunity to invest today with an eye toward improving asset values in months and years to come.
Japan: In the Midst of a Bull Market
The Japanese story is perhaps even more provocative. In fact, we believe that we could be early in a long-running Japanese bull market.
Plagued by low growth, Japan has been out of favor for two decades, and many attractive companies are now trading at below book value. On a total market basis, the Nikkei is now trading at just 1.4 times book value, compared with 2.4 times book value for the S&P {500}.
As was the case in the U.S. -- and is now in Europe -- Japan is deploying monetary tools to move its economy forward, with the Bank of Japan conducting a massive asset buying program to increase the money supply, depreciate the Japanese yen and stimulate growth. The government is also progressing on other structural reforms, including improving corporate governance and reducing corporate taxation.
Ultimately, Japanese investors’ willingness to invest in their own stock market could be the biggest mover. Overall, individual Japanese investors maintain just a 6 percent allocation to equities. That will not be enough, given the mismatch between the financial needs of an aging population and ongoing low bond yields. We believe that the Japanese investing marketplace is on the verge of a fundamental and broad-scale shift toward stock investing and away from cash and bonds, particularly as the Japanese government continues to pursue policies designed to stimulate inflation. We want to position our investors ahead of the shift, because the impact on Japanese stock valuations could be profound.
Support for "Thinking Globally"
The case for a smartly constructed, long-term global allocation portfolio is firmly established. Yet, the Japan and Europe stories -- and the contrast with an aging U.S. bull market -- represent fresh support for investors to think about owning a well-diversified global portfolio.
If the global market crisis taught investors anything, it is surely that the relative appeal of asset classes, industry and business sectors, and nations and regions changes all the time -- often suddenly and precipitously. Investors also need to recognize that, a home market's comforts notwithstanding, investment beyond the U.S. -- far from being inherently risky -- will typically be a valuable counterbalance to the arguably more serious risk of over-concentration at home.
Helping investors stay properly positioned globally will remain a long term exercise. But showing an investor that tapping a new market beyond home is not about taking on incremental risk -- but rather seeking a new source of value that can restore their portfolio risk/return balance to a comfortable posture -- can go a long way toward "thinking globally" in the most positive and rewarding way.