July 16, 2012
Global Equity Valuations
The global equity markets continue to experience disappointing returns. In discussions with clients, my advice is a reminder that the research shows that developing a strategic asset allocation plan and staying the course through rebalancing is the prudent course of action.
The European sovereign debt crisis is in its third year and continues to create great uncertainty in global financial markets. Investors globally are expressing concern about the impact of the crisis on economic growth rates and the financial system. Understandably, this is an anxious time for investors.
Europe’s inability to deal conclusively with its problems is discouraging. It is obvious that the issues facing Europe will not be resolved in the short run. But exiting European investments entirely seems like an overreaction. In fact, European equity price/earnings ratio, a common means of valuation, indicates that European equities are reasonably priced. It is certainly better to invest when valuations are low, and one should never make investment decisions based on today’s headlines.
A deep European recession would likely have a moderate impact on the U.S. economy. Europe accounts for 15% of total U.S. exports or about 2% of U.S. GDP. European markets represent 14% of total revenue of the S&P 500 companies. The U.S. economy should prove resilient enough to weather the most likely bad scenarios – e.g., weaker countries such as Greece exit the euro.
Economic problems exist in Spain, France, Italy, Portugal and Greece. Greece has been generating most of the headlines, but it is a small country by market capitalization and therefore makes up a very small portion of portfolio holdings within the global equity funds that Rockbridge utilizes.
Of course, global equity funds also have sizable holdings in non-European markets, both developed and emerging. These markets have had mixed recent results.
Exposure to international equities, which often behave differently than domestic equities, are a way to provide the diversification that tempers a portfolio’s volatility. Basing investment decisions on headlines, fear, or speculation is always counterproductive. Being calm and disciplined with our asset allocation strategies is the better approach. If you have concerns on your allocation to global equities, talk to us.