The U.S. stock market is expensive and bond yields aren’t far from record lows. European and emerging market stocks, on the other hand, have approached stomach-turning status, says Jason Zweig of the Wall Street Journal. The European market has dropped by 12% while emerging markets have plummeted by 21.8%.
Stabilized oil prices and a possible interest rate hike by the Fed has lifted investors’ outlook on these markets by a marginal 2% to 3%, but the fact remains that overseas stocks are cheap. In fact, according to data from MSCI, as of April 30th the average price-to-book value of European stocks has been about 40% below that of U.S. stocks (50% for emerging markets) and the dividend yield 69% higher (33% in emerging markets).
According to David Herro, manager of the $26 billion Oakmark International Fund, a few leading European banks offer “acute value” due to decreasing expenses, healthy capital cushions and decreasing losses from non-performing loans. On the emerging market front, Robert Arnott (chairman of Research Affiliates), says that while a lot can go wrong, it wouldn’t take much good news to create a bull market. In the meantime, the low stock prices “offer margin for error while investors wait for positive surprises,” writes Zweig.