Stick with stocks, says BlackRock’s Koesterich
The beginning of June was marked by gains for both stocks and bonds, highlights BlackRock’s Global Chief Investment Strategist Russ Koesterich says.
Bonds and Stocks Both Rally
Bond yields fell to an 11-month low, with the yield on the 10-year US Treasury hitting 2.44% as prices correspondingly rose. A similar trend was evident outside the U.S., with German 10-year Bund yields trading at below 1.30%, the lowest level in a year.
Meanwhile, stocks also advanced, with the Dow Jones Industrial Average up 1% for the week to 16,717. The S&P 500 Index climbed 1.49% to 1,923, while the tech-heavy Nasdaq Composite Index rose 2.25% to 4,242.
Broadly speaking, both stocks and bonds are looking expensive. But at current levels, traditional bonds in particular offer little value. We don’t expect a big selloff in bonds, causing rates to sharply climb back up, but overall, we continue to favor equities over bonds, even as stocks continue to move toward new highs.
Looking for (Relative) Value
Rather than chase yields lower, we’d continue to favor stocks. That said, investors do need to recognize that equity markets are also getting more expensive, with the rally in stocks pushing valuations toward the upper end of their historical range. Valuations for both the S&P 500 Index and the MSCI World ex-U.S.A Index of developed markets are now trading at four-year highs. Stocks are beginning to look expensive in an absolute sense, although they still look cheaper than bonds.
However, there are two big exceptions to this stock story: Japan and emerging markets (EMs). Of the major developed markets, Japan-which has actually underperformed Russia year-to-date-is by far the cheapest. Currently, Japanese equities are trading at just 1.17x book value, a 56% discount to U.S. stocks and a 43% discount versus a broader measure of developed markets. Japan typically trades at a lower valuation-due to relative low profitability-but the current discount looks large.
For their part, EMs also look reasonably priced, trading at a discount to their postcrisis and long-term averages. While not particularly cheap on an absolute basis, EM equities still appear inexpensive relative to their developed market counterparts.
In short, in a world of few bargains, investors need to tread carefully and look for relative value. Within equities, Japan and EM offer that sort of relative value, and for the same reason, we still prefer stocks over bonds.