Are We In a Bubble? Where—and How—to Find Value in Today's Market (June 2013)
by Russ Koesterich, Managing Director
iShares Global Chief Investment Strategist
Are we in a bubble? That’s the question many investors are asking with equities up 25% since their June 2012 bottom. If it’s not a bubble, are the high returns sustainable? And what methods best determine if a market is cheap? This paper takes a look at these questions. Our findings:
No, it’s not a bubble. Despite the rally, most traditional valuation metrics still suggest that stocks appear reasonably priced on an absolute basis and cheap compared to the alternatives, particularly cash and bonds.
But be careful, reasonable valuations, particularly in the United States, are partly a function of record high profit margins. These are likely to revert back to their longterm average. Equities are still likely to outperform bonds—which are unusually expensive thanks to central bank buying—but are unlikely to produce the consistent double-digit returns that have historically been the result of lower valuations.
Looking for value—our approach. When evaluating the market, we look beyond simple value metrics and take into account the macroeconomic fundamentals that have historically driven value. That methodology reveals:
- What’s expensive: areas where investors are paying too much for either safety or growth. Some examples of the former are the United States and Switzerland,
while the latter includes smaller emerging markets, such as the Philippines, which are vulnerable to any deceleration in growth.
- Where we find bargains. Primarily in the larger emerging markets, Asia, and parts of Europe where investors have been scared away by the perceived risks. While we would not minimize those risks, we believe that the headwinds are more than discounted into the price. For investors able to accept the volatility, these areas look like the best long-term values.
Previous Market Perspectives
- The End of the consumer? What the long-term decline of consumption means for investors (May 2013)
Russ Koesterich describes what the long-term decline of consumption means for investors (May 2013)
- The Case for Emerging Market Bonds (April 2013)
Russ Koesterich explains why it can play a significant role in a portfolio. (April 2013)
- Living in a Zero-Rate World (March 2013)
The Impact of Fed Policy on the Economy and Inflation (March 2013)
- Breaking Bad Behaviors (February 2013)
Understanding Investing Biases and How to Overcome Them (February 2013)
- 2013 Outlook (January 2013)
Russ Koesterich discusse Three Scenarios for the Coming Year (January 2013)
- The Slow Mo Economy (December 2012)
Russ Koesterich discusse preparing for slow US growth over the long term.
- Europe at a Crossroads: The Outlook and Opportunities
Russ Koesterich discusses where the opportunities are - and how there is still much work to be done to address Europe's problems.
- The Case for Minimum Volatility in the Near - and Long - Term.
Russ Koesterich and Dan Morillo explain why volatility may be with us for a while and suggest investors may want to consider min vol in their portfolios.
- In Search of Yield: Finding Equity Income in a Low-Yield World (September 2012)
Yields are low, and could be for some time. Russ Koesterich discusses where to go.
- Days of Reckoning: The Potential Impact of the 2012 Elections on the Markets. (August 2012)
How could the upcoming US elections affect your investments? Russ debunks some common myths. Listen to podcast
- Mid-Year Outlook: What's in Store for the Second Half of 2012. (July 2012)
How did Russ's forecasts for the first half of the year pan out? And what is Russ's roadmap for the rest of 2012? Listen to podcast
- Not so Golden Years: How an Aging Society Can Impact the Markets. (June 2012)
As the US population grows older, markets could be affected - but how? And will opportunities for yield shrink? Listen to podcast
- Money for Nothing - Navigating Fixed Income Investing in a Low Yield World (May 2012)
Do bond investors have any choices other than low rates or high risk? Listen to podcast
- Stand or Fall: Record Profits. How Much Longer? (April 2012)
How long can corporate profit margins last, and what should investors do as profits start to shrink? Listen to podcast
- Emerging Market Outlook: Is it time to overweight? If so, how? (March 2012)
Is it time to overweight emerging markets? Russ Koesterich has the answers. Listen to podcast
- Still Standing, Still Cheap (February 2012)
What's the outlook for municipal bonds in 2012? Russ Koesterich explains. Listen to podcast
- What's in store for 2012 (January 2011)
Check out Russ Koesterich's economic and market outlook.
- The Case for CASSH (December 2011)
Find out what CASSH stands for—and why Russ Koesterich likes it.
- Are Emerging Markets the New Defensives? (November 2011)
Russ Koesterich asks are emerging markets the new defensives?
- Can the Calendar Save the Market? (October 2011)
A discussion about how investor behavior can be influenced by seasonal trends.
- The Commodity Conundrum (September 2011)
- Preparing for Higher Rates: When Will Rates Rise and what it Means for Investors (August 2011)
Analysis of when interest rates might go up, and how to adjust a portfolio when they do.
- A Mid-Year Update to the 2011 Outlook (July 2011)
What to watch for in the second half of 2011.
- The Case for Equities (June 2011)
Russ Koesterich, iShares Chief Investment Strategist, shares his views on why the long-term outlook for equities is attractive.