Where are the global stock markets headed in fourth quarter
and where should
Several investment strategists share their outlook and best
ETF investing ideas for the final stretch of 2013.
1.iShares MSCI Italy (
Bill Witherell, chief global economist at Cumberland Advisors
in Sarasota, Fla., with $2.2 billion in assets under
The moderate recovery in the eurozone economy remains on
track. The latest indication is the flash reading for September
of the Markit Purchasing Managers' Index. The composite index
covering both manufacturing and services rose from 51.5 to 52.1,
the highest level in 27 months.
Gross domestic product growth for the eurozone as a whole
became positive in the second quarter and is projected to remain
positive but slow going forward. GDP growth for 2014 may be only
slightly above 1%.
have responded strongly to the return of modest growth in the
economy. According to the MSCI comprehensive indexes for national
equity markets, the eurozone equity market in aggregate has
increased by 16% over the past three months, which is better than
the 6% for the U.S., the 12% for the advanced markets outside
North America and 8% for emerging markets.
The explanation for this outperformance, despite subdued
prospects for economic growth, appears to be valuation. Equity
valuations suffered from the past crisis and from doubts about
the future of Europe. Comparing the Stoxx Europe 600 with the
S&P 500, we see that the price-earnings ratio for the Stoxx
Europe 600 is still only 13.1, compared with 14.9 for the S&P
500. The corresponding price-to-book value ratios are 1.7 vs.
Of the eurozone's larger equity markets and economies, Spain's
and Italy's are the two that have gone through much more
difficult times during the past two years. Spain's Prime Minister
Mariano Rajoy announced that Spain has emerged in late summer
from two painful years of recession.
It looks likely that Italy has as well. Rajoy noted that Spain
still faces years of fiscal austerity and difficult adjustments.
He concluded that "Spain is out of the recession but not out of
The same could be said for Italy. In large part because their
valuations have been driven so low (the price-to-book values are
1.0 and 0.9), these markets have outperformed during the recovery
over the past three months: Spain, 23.3%; and Italy, 21.8%.
2.Vanguard FTSE All-World ex-U.S. (
Chris Costanzo, investment officer at Tanglewood Wealth
Management in Houston with $750 million in client assets.
We own VEU across all client portfolios. It is time for
investors to consider tilting their portfolio exposure away from
outperforming domestic equities toward underperforming
international equities. Valuations in international markets look
While most people talk about Shiller price-earnings ratios in
the U.S. as being expensive, not many mention that Europe and
Asia are selling at large discounts to their historical median
The 12-month forward P/E of the MSCI Europe index is
statistically correlated to average returns over the next 10
years. At 10 times forward (earnings), we have historically seen
15%-plus returns over the following 10 years. The 1999 multiple
of 25 times led to 4% returns over the following 10 years.
Currently, at 13.1 times we are at levels that historically
have seen 10%-15% returns. Not extremely undervalued, but
VEU yields 3%, has a low expense ratio of 0.15% and has
exposure to emerging markets, which are also undervalued. The
regional allocation is 18% emerging markets, 46% Europe, 29%
Pacific and 7% Americas.
PMI surveys across the world are improving with increases in
the U.K., eurozone and Japan, which tend to foretell earnings
3.Short iShares MSCI Australia (
Srinivas Thiruvadanthai, research director at the Jerome Levy
Forecasting Center in Mount Kisco, N.Y.: Australia has multiple
vulnerabilities: heavy reliance on key commodity exports to
China, an unsustainable boom in mining investment, hugely
overvalued home prices and a banking sector that is dependent on
wholesale funding from international markets.
A hard landing in China will not only strike Australia's
exports and current account hard, but also exacerbate any
weakness in mining investment. In fact, the unprecedented
investment in mining structures and equipment that has been
supporting the Australian economy is already peaking.
Meanwhile, rate cuts helped the housing bubble in Australia
defy gravity, but the household debt-to-income ratio is at record
levels and the labor market is weakening. The housing market is
Lastly, Australia's banks are exposed to the real estate
sector and also to international funding. Any adverse
international financial developments would create problems for
The imbalances in the Australian economy are reflected well in
EWA, which has a 17% weighting in basic materials stocks and a
whopping 43% weighting in financial services.
A short EWA position will also benefit from weakening in the
Australian dollar, which even after recent declines is in real
terms roughly 30% above its long-term average.
For those who are long in China, Australia's domestic problems
combined with its heavy Chinese exposure make a short Australia
position a well-suited hedge to long Chinese positions.
4.iShares MSCI Brazil Index ETF (
Brett Owens, editor of
: According to research by investing guru Mebane Faber, we can
average triple-digit returns when we buy "clobbered countries" --
those that shed 50% or more of their stock market value.
Brazilian shares fit the bill. A grinding three-year bear
market has the market selling at "half off" its 2010 price. When
Brazil is motoring as it was in 2007 and during the 2009-10
"reflation rally," it's an emerging market "blue chipper."
Since topping in late 2010, the mainstream investing community
has left Brazil for dead at exactly the wrong time. A reasonable
Chinese economy could really get Brazilian stocks rocking and
rolling. And we have a chance to make triple-digit returns, while
risking only a small portion of our capital.
5.db X-trackers MSCI Germany Hedged Equity (
Martin Kremenstein, Americas head of passive asset management
at Deutsche Asset & Wealth Management in New York with $60
billion in assets under management: Germany's recent re-election
of Chancellor Angela Merkel has provided strength to the country,
producing a ripple effect throughout the eurozone.
While German equities stand to benefit, questions still remain
as to whether neighboring countries will impact the price of the
euro. For the past three years, investors' fears of the
eurozone's instability have left many on the sidelines, but now
that the political situation in Germany has been decided, many
economists believe Germany will continue its upward growth
With this in mind, U.S. investors should consider direct
investments in German equities, while remaining cautious on the
euro. Those who seek to invest in German companies without
exposure to the currency risks involved should consider the db
X-trackers MSCI Germany Hedged Equity Fund, which mitigates the
impact of fluctuations between the U.S. dollar and the euro.
Many investors are still not aware of the currency risks they
inherit when they invest in international equities. The biggest
misconception is the belief that because you purchase an ETF in
U.S. dollars, you do not have currency exposure.
The prices of unhedged ETFs are determined by both the stock
and currency values. This means that the underlying stocks can
rise in value, but your investment can fall due to moves in the
Hedged equity ETFs, such as those on Deutsche Asset &
Wealth Management's db X-trackers platform, offer a solution to
this problem. Currency hedging can reduce volatility in
portfolios and allow investors to position themselves for
changing head winds in the market.
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