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“Extreme Volatility”: Europe’s Problems Aren’t Solved But Pimco’s Kashkari Is Still Bullish

Aaron Task
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The recent rally picked up steam Thursday thanks to a coordinated easing from five global central banks aimed at alleviating funding pressure on European banks. (See: "Fire Bad! Free Money Good!" Traders React to Global Central Bank Bailout)

The Dow and S&P each gained 1.7% while the Nasdaq climbed 1.3%. Thursday's gain brought the S&P's weekly advance to 4.3% and put the index above 1200 for the first time since Sept. 1. Treasury yields tumbled and gold shed 2% to $1791 per ounce as the "flight to safety" trade came unwound -- at least for one day.

But Europe's sovereign debt crisis is far from resolved and "extreme volatility" in financial markets will continue, says Neel Kashkari, head of global equities at Pimco and former U.S. Assistant Secretary of Treasury.

"Europe needs a lot more help before they'll solve this problem," Kashkari says. "This is an interim step. There's a lot more necessary to really stabilize the euro area."

Stay tuned for part two of this interview, where Kashkari details the steps he thinks Europe could and should take to address its crisis. In the accompanying video, we focus mainly on why he believes stocks are "very attractive" for long-term investors, despite Europe's woes and the myriad other uncertainties in the global economy.

Three Reasons to Be Bullish

There are three main reasons why Kashkari says investors can expect high single-digit returns from stocks over the next 3- to 5-years:

  • Multiple Expansion: At roughly 12.5, the P/E of the S&P 500 is attractive, especially relative to Treasuries, and has room to grow.
  • Earnings Growth: "We don't think [S&P 500] earnings are going to grow as fast [as in the past year] but we still think the outlook is strong because of the exposure to emerging markets," he says.
  • Dividends: At 2.25%, Kashkari believes there's upside potential to the dividend yield of the S&P 500, which is already above the yield of the 10-year Treasury, even after Thursday's rout in bonds.

"If Treasuries sold off massively over the long term that could change relative return expectations," he says. "Today, we think stocks are attractive…but it's very important for investors to be able to stomach volatility and look out several years and say 'I can stay invested over this cycle.'"

That's true for U.S. stocks and even more so for emerging market equities, where P/Es are lower, dividends are higher and earnings growth is faster, Kashkari says. "To the extent investors are willing to withstand higher volatility we think the returns can be even more attractive" in emerging markets.

Again, Kashkari expect high levels of volatility to continue and is "very focused on the long-term outlook for stocks." That's a good thing generally and specifically here as The WSJ reports Pimco's equity funds have lagged benchmarks in their relatively short life spans.

Aaron Task is the host of The Daily Ticker. You can follow him on Twitter at @atask or email him at altask@yahoo.com

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