The first half of 2023 was almost the opposite of last year for investors: equities entered a new bull market. They shrug off fears of a recession and lower profits. Last October it was unthinkable that we would now come close to new record highs. Of course, there are investors who therefore wonder whether they have missed the boat.
The future is always uncertain, but according to Morningstar there are certainly still opportunities for long-term investors to be found. Analysts from the platform think it is wise to look for areas that have not yet celebrated so lavishly. They come up with three asset classes that they think are worthwhile: emerging markets, European equities and US banks.
1. Emerging Markets
US equities have beaten emerging markets for more than a decade. Because of this, many investors think that US stocks always outperform. History, on the other hand, teaches us that markets are cyclical: every investment has sunny days and cloudy days, so to speak.
periods of extreme outperformance are common, but the pendulum swings both ways. History indicates that the next decade could be very different. The table below shows the total return figures for four different periods of emerging markets and US equities over the past 25 years.
* Bron: Morningstar.com
Emerging markets account for 80% of the world’s population and nearly 70% of gross domestic product (GDP) growth, but only 11% of total global equity capital. This means that there is a convincing long-term investment story. And many of the best opportunities are at the individual country level, because emerging markets are heterogeneous. Investors tend to view emerging markets as a whole, but often the real opportunities are specific to country, sector or region.
2. Europe: sectors and countries
Europe suffered the same fate as emerging markets in that it underperformed US equities in terms of returns. But the same historical performance patterns seen in emerging markets also apply to Europe. Going forward, analysts see reasons why Europe could be relatively resilient relative to other major developed markets.
High inflation and the economic fallout from the war between Russia and Ukraine have affected stock prices in Europe, creating attractive valuation opportunities. Certain European countries and industry groups are trading at very reasonable valuations. Morningstar gives two examples:
European financial institutions – The financial sector has a much larger weight in European indices than in American ones. The banks have benefited from higher interest rates and this has led to improvements in profits.
There have been periods in recent years when interest rates in Europe have been negative, meaning that banks have had to pay to store their excess reserves with the central bank rather than receive interest income. Now that interest rates are normalizing, stock prices have some catching up to do.
German stocks – Germany is the economic engine of Europe, accounting for 25% of Europe’s GDP. The consequences of the war between Russia and Ukraine raised fears of a deep recession in Germany. Given the sizeable headwinds and cyclical gains (particularly from the auto industry), German equities have been quite resilient, with solid balance sheets and potential earnings growth – without extreme valuations. 3. US Banks
Markets are usually efficient, but occasionally situations arise that allow investors to buy pieces at deep discounts. The US banking crisis in March seems to have been such a situation. Despite three bankruptcies, the banking system was incredibly resilient. Actually, it was not a banking crisis, but rather a crisis of a few banks.
While the fundamentals of most banks remained stable, their share prices did not. It was a situation where the baby was thrown out with the bathwater. The regional bank index was down nearly 40% through early May.
Since then, bank shares have bounced back, but prices are still lower than at the beginning of March. While technology stocks attract most of the market’s attention, discounted bank stocks have the potential to provide significant returns in the future.
Read also: Germany: from leader to middle class
Of Editorial of IEX consists of a team of content managers, journalists and analysts, with more than a hundred years of combined experience in producing and publishing investment information and opinions. The information in this column is not intended as professional investment advice or as a recommendation to make certain investments. It is possible that editors hold positions in one or more of the listed funds.
2023-09-07 06:30:00
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