The six-year, bull run for stocks here in the U.S. has lifted valuations to levels that are best described as full. The length of an uptrend doesn’t in and of itself mean it has to end, but I don’t believe we should assume it will continue to rise at the pace of the last few years. We are likely to see increased volatility and the chance of a larger correction in the next couple years.
Likewise, with 10-year, U.S. Treasury bond yields at just above 2 percent, and European bond yields in negative territory, high quality bonds issued by governments and corporations seem more than fully valued. Any rise in rates here in the U.S. would dent the values of these bonds and other interest sensitive sectors, such as traded real estate investment trusts, master limited partnerships and utility stocks.
So where should investors look for value now? Obviously we can’t predict the future, but looking for investment opportunities in areas of the markets which have not done well in recent years seems to be a good way to go. Below are brief descriptions of two themes I believe make sense to consider for the next few years.
The MSCI EAFE Index of international stock markets currently has a price to earnings ratio of about 15. The S&P 500 index of U.S. large companies has PE ratio of 19. International equities are over 20 percent cheaper on this measurement and, in many cases, provide higher dividend yields than their U.S. counterparts.
The MSCI Emerging Markets Index has a PE ratio of 12, or 36 percent less expensive than U.S. stocks. Both developed and developing international economies have struggled in recent years while the U.S. has enjoyed a decent recovery. The cycle will eventually shift, and I will not be surprised when we enter a period where international equities outperform the U.S.
Regulatory changes both domestically and internationally have caused banks to ignore or not be willing to lend to what we call middle market companies. These are generally private companies that do not have stock trading on an exchange and which have annual revenues in the $50 million to $1 billion range.
These companies are willing to borrow from private debt funds at interest rates that are higher than the rates paid by most other debt. The loans are generally secured by corporate assets, which means a reasonable recovery in most cases should the company default on its obligation.
These securities are not liquid and generally need to be accessed through managed funds established for the purpose of taking advantage of this opportunity.
Investors should not upset their entire investment plan to take advantage of investment themes like these, but they should be considered for minor to moderate shifts in portfolio strategy.
Tom Breiter is president of Breiter Capital Management, Inc., an Anna Maria based investment advisor. He can be reached at 778-1900. Some of the investment concepts highlighted in this column may carry the risk of loss of principal, and investors should determine appropriateness for their personal situation before investing. Visit www.breitercapital.com.