Why investors need to get out of North America
Investors looking to buy the broader market are going to have to go outside North America if they want to find any value.
That verdict comes from Russell Investments, in its latest Quarterly Global Outlook. Canada and the U.S. are currently rated underweight by the manager, which looks at global equity and bond markets based on their valuations, economic growth potential and monetary policy, among other factors.
The asset manager said it has shifted to a neutral view on global equities this quarter, noting stocks have become expensive and that market uncertainty has increased. Europe, however, was viewed as one bright spot for investors.
“The combination of expensive value in most markets, a positive cycle and neutral/slightly positive sentiment gets us to an overall neutral view on global equities,” Russell Investment strategists said in their outlook. “Within equities, the strong cycle view gives us a preference for Europe among major geographic regions globally.”
June has been a bad month for European stocks, with the Greece crisis scaring off investors from the continent. The STOXX Europe 600 Index — a collection of the eurozone’s biggest companies — is down more than four per cent for the month.
But Wouter Sturkenboom, senior investment strategist at Russell Investments, said there was still plenty to like about European companies. Their valuations are a lot better than the U.S., while a monetary stimulus policy is helping support corporate earnings.
Sturkenboom recommends investors use any further pullbacks caused by Greece to load up on more eurozone stocks.
“We maintain our overweight position to eurozone assets, expanding from equities and peripheral government bonds into core government bonds,” he said. “Any further Greecerelated unrest is still considered a buying opportunity because we do not believe Greece is capable of derailing the eurozone recovery.”
Japan is the other international bright spot outside of Europe. Graham Harman, senior investment strategist, said that the country’s ongoing easing and reforms were offering fertile ground for the Nikkei to rally further.
“The evidence is now starting to build around a real re-acceleration,” he said. “Improvements are being driven by short-term stimulus effects such as lower energy prices, a weaker yen, and resolute Bank of Japan (BoJ) action.”
Harman is upbeat about reforms enacted by the Japanese government, which include working to increase female participation in the workforce. However, despite the business-friendly policies, economic indicators in the country continue to be tepid at best, leading him to recommend investors simply rate the country as neutral.
Other markets have a less rosy outlook. Paul Eitelman, North American strategist, said that investors should underweight the U.S., even though its economy is one of the fastest growing among developed countries.
“Expensive valuations offset a favourable macro backdrop,” he said. “Investors, in our view, should expect more muted returns from U.S. assets going forward.”
Given that the firm believes there is little economic growth potential in Canada, investors here would do better to look overseas for further gains this year.