Although the U.S. economic recovery appears to be gaining
steam, lofty stock prices and rising geopolitical risks are
finally taking a toll. Last week, stocks suffered their
worst one-day slide in six months while volatility reached the
highest level since last spring.
However, as I write my latest
weekly investment commentary
, investors need to look outside the United States for
opportunities. In particular, Asian stocks - both developed and
emerging - are intriguing, and have outperformed thanks in part
to less challenged valuations.
Ironically, the sell-off occurred in a week that brought the
release of a string of positive economic news, not the least of
which was a strong gross domestic product report for the second
quarter. The July employment data also showed more than 200,000
net new jobs were added for the sixth straight month, further
confirming that the United States has fully recovered from the
first quarter's economic contraction.
However, the good news was not enough to keep stocks moving
higher. Instead, a host of issues caused stocks to sink more than
they have in almost six months: Argentina defaulted on its debt
for the second time since 2001, a key Portuguese bank was ordered
to raise capital, the U.S. and Europe imposed new sanctions on
Russia and investors were disappointed over soft earnings from
Samsung, Adidas AG and Lufthansa.
The Argentina and Russia situations are suggestive of problems
in emerging markets (EMs), although Argentina is technically a
frontier market. Nevertheless, last week also saw the
largest flows into EM funds since early 2013.
However, much of the turn in sentiment and performance can be
attributed to visible improvement in the Chinese economy. Last
week, a key measure of Chinese manufacturing activity - the
Purchasing Managers Index - improved for a fifth consecutive
month. Stronger economic numbers such as this helped Chinese
equities to rise more than 8% last month.
And the gains were not limited to China. Korean and Japanese
stocks - indirect beneficiaries of the upturn in China's economy
- are also outperforming the broader market.
It is difficult to predict if the spike in U.S. volatility we
saw last week will be short-lived. Even if it is, we find still
cheap valuations, some lift in China's economy and improving
sentiment are all good reasons to consider larger allocations to
Asian equities, including those in both China and Japan.
Russ Koesterich, CFA, is the Chief Investment Strategist
for BlackRock and iShares Chief Global Investment Strategist.
He is a regular contributor to
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International investing involves risks, including risks
related to foreign currency, limited liquidity, less government
regulation and the possibility of substantial volatility due to
adverse political, economic or other developments. These risks
often are heightened for investments in emerging/ developing
markets or in concentrations of single countries.