REPOST: International Stocks: The Best Opportunity?

Asset diversification is a vital rule of thumb to mitigate risks associated with investing. Diversification, however, is not just about having a good mix of local stocks and various securities. Tapping into international markets, particularly emerging economies, should also be part of the whole asset allocation strategy. Here some important figures from Barron's:


European and emerging market assets are more attractive than U.S. investments based on valuation, J.P. Morgan said in its outlook for the third quarter.

The guide to investing notes that emerging markets have been the runaway winner, with a rise of nearly 19% as of June 30 (in dollars). EM is about 12% of the MSCI All-Country World Index. Here are some other regional returns as of June 30: a rise of nearly 12% for the all-country world index, 18.3% for Europe and 13.6% for Pacific ex-Japan. Among countries, China was a big winner, up 25% in dollars; India was up 20.5%; France, nearly 18%; and Germany, up 16%. Russia has been a notable loser: it was down 14% as of June 30.

Here are two of the 10 pieces of investment advice touch on emerging markets:

"EQUITES: U.S. earnings in the next 12 months are expected to be at a record high. However, earnings in both Europe and Emerging Markets remain far below their 2011 peaks. A long cyclical recovery in Europe and an improving banking system should lift European earnings while EM profits should rebound on firmer commodity prices. Both European and EM earnings appear to have more room to grow than in the U.S. While U.S. price/earnings ratios are above their 25-year average, Europe and EM look more attractive from a valuation perspective: European P/Es are slightly above average, and comparison to local bond yields makes for an even more compelling case. Meanwhile, EM Price-to-Book ratios remain significantly cheaper than average. If, in the long run, the U.S. dollar falls to more reasonable levels, this could add to the returns on (unhedged) international equities ...

BONDS: " ... Long-term interest rates remain very low, especially compared to historical averages. As the Fed continues to raise short-term interest rates and reduce its balance sheet, 10-year U.S. Treasury yields should gradually increase. This back-up in rates should result in weak total returns on Treasuries and some high-quality corporate bonds, suggesting that investors may want to consider investing in other fixed income sectors, like high-yield debt or emerging markets, or shifting their portfolio allocation to underweight bonds relative to other asset classes ..."

The final piece of advice in the report: higher valuations and uncertainty underscore the need for broad diversification.

The SPDR S&P 500 ETF Trust (SPY) was flat in recent trading, while the iShares MSCI Emerging Markets exchange-traded fund (EEM) was down 0.6% after hitting another 52-week high last week.  The iShares MSCI Emerging Markets Asia ETF (EEMA) was down nearly 0.8%.

 "The opinions expressed in this re-posted article are not necessarily the views of LOM, but are presented to provide a broad spectrum on financial matters."

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