By Russ Koesterich, CFA , iShares Global Chief Investment Strategist
With global equities up more than 25% since their bottom last June, many investors are wondering: “Is it too late to move cash from the sidelines? Should I wait for a pullback?” My answer to both questions: no, with a caveat. As I write in my latest Market Perspectives piece, while stock prices aren’t yet in a bubble, some parts of the market do look more expensive than others. That’s why I advocate that investors, especially those just starting to dip their toes in, focus on three areas of the market that look reasonably priced [For more ETF analysis, make sure to sign up for our free ETF newsletter].
Certain International Markets: With investors paying a big premium today for safety, the US market looks somewhat stretched compared to its international peers. As such, I’d be more hesitant to commit a lot of new capital there. Instead, I’d focus on other parts of the world where valuations are lower [also see Five Things To Watch Out For In International Equity ETFs].
Among emerging markets, I especially like the bigger ones such as Brazil and China. Among developed markets, I like smaller ones such as Hong Kong. While these international economies aren’t without their problems, they generally look fundamentally sound and have been punished for slower-than-expected growth. Too much pessimism is reflected in their prices.
US Mega Caps: Another idea to consider, particularly for those wary of investing in potentially more risky emerging markets, is to look toward US mega caps, accessible through the iShares S&P 100 Fund (OEF, A-). They’re the cheapest area of the US market and they tend to be less volatile than small- and mid- cap names. Plus, if we do see some pick up in stock market volatility over the summer, as I expect, mega caps aren’t likely to suffer as much as small caps [also check out the Visual History Of The Dow Jones Industrial Average].
Certain Cyclical Sectors: In recent years, investors have been paying a big premium for the yield and relative safety of defensive sectors such as consumer staples and US utilities. In contrast, I’d put new money to work in cyclical sectors such as energy and technology, which arguably represent better long-term values than their more expensive defensive counterparts. These sectors are accessible through the iShares Dow Jones U.S. Technology Sector Index Fund (IYW, A) and the iShares Dow Jones U.S. Energy Sector Index Fund (IYE, A).
Looking forward, though I do expect that market gains will likely slow and become more volatile, I believe that global stocks will finish 2013 higher. Today’s slow, but still positive, global economic growth, generally benign inflation and likely continued accommodative monetary policy should be supportive of risky assets [also see 7 Articles ETF Investors Must Read: 5/23].
The bottom line: Instead of worrying about whether it’s too late to get into the market, investors looking to put cash to work should focus on where to find relative value.
Investing involves risk, including possible loss of principal. In addition to the normal risks associated with investing, narrowly focused investments typically exhibit higher volatility. Technology companies may be subject to severe competition and product obsolescence. The energy sector is cyclical and highly dependent on commodities prices. Companies in this sector may face civil liability from accidents and a risk of loss from terrorism and natural disasters.
International investments may involve risk of capital loss from unfavorable fluctuation in currency values, from differences in generally accepted accounting principles or from economic or political instability in other nations. Emerging markets involve heightened risks related to the same factors as well as increased volatility and lower trading volume. Securities focusing on a single country may be subject to higher volatility.
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