Why Europe, emerging markets and income investing are back

Earlier this year, I made three predictions for the remainder of 2013.

  1. Europe would come “back from the dead” and lead the U.S. market.

  2. Emerging markets would enter a new bull market.

  3. Income-oriented investments would recover from the beating they took during the summer “Taper Tantrum.”

As I noted in last month’s manager commentary, European markets are indeed back from the dead and performing well. Emerging markets have also rallied hard and, in my opinion, are in the early stages of a new bull market.

And income-focused assets have enjoyed a rebound after the brutal drubbing they took, though it may be too early to call victory here. Treasury yields are rising again and at their highest levels in a month.

I’m a little worried that the U.S. markets are getting ahead of themselves. Though I do not by any stretch believe we are in a “bubble,” the S&P 500 looks fairly priced in my opinion, and bargains are getting harder and harder to come by across all market caps.

That is not at all the case overseas, however.  I believe that European stocks, even after their recent run, still trade at substantial discounts to American stocks (20%-40% based on trailing earnings). And emerging markets are so cheap they appear to have been left for dead. So long as this pricing disparity persists, I intend to focus most of my investment research outside of the U.S. markets.

Again, I’m not bearish on the U.S. markets. I’m just less enthusiastic about them at current prices, and I believe we can find better investment bargains elsewhere.

DISCLAIMER:  The investments discussed are held in client accounts as of October 31, 2013. These investments may or may not be currently held in client accounts. Foreign investments may be volatile and involve additional risks including currency fluctuations, and political and economic uncertainties. The reader should not assume that any investments identified were or will be profitable or that any investment recommendations or investment decisions we make in the future will be profitable. Past performance is no guarantee of future results.