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Weekly Commentary
The tide has yet to turn for non-U.S. equities
Bottom line up top
- Today’s ultra-cheap non-U.S. equity valuations may be alluring, but beware the impulse to jump right in. For some investors, this may be easier said than done, bringing to mind Oscar Wilde’s famous quip, “I can resist everything except temptation.” Yet resistance to temptation is exactly what’s called for when assessing non-U.S. stocks based on their current equity risk premiums (Figure 1). Their bargain-bin levels may represent value traps rather than true long-term value.
- A conspicuous lack of positive catalysts is the main source of concern. Across regions, we see far more headwinds than tailwinds to justify establishing or adding to non-U.S. equity allocations.
- Europe. The energy crisis and war in Ukraine are the most obvious disruptors of economic activity. Germany has nationalized a major power company and plans to ration energy to stretch reserves, which will limit industrial output. Additionally, the European Central Bank has just started raising rates, putting it far behind both the Bank of England and the U.S. Federal Reserve, especially after another aggressive U.S. hike last week (Figure 2). These factors outweigh the positives of bolstered energy reserves and fiscal stimulus. Stimulus will help consumers but likely exacerbate inflation, which is on the rise and not expected to ease any time soon.
Developments that could help turn the tide: A de-escalation of the war, new sources of energy being brought online and the possibility of a milder-than-expected winter. - Japan.The Bank of Japan (BoJ) reaffirmed its outlier dove status among central banks last week through its yield curve control policy. It purchased ¥2 trillion of bonds to put a ceiling on rates and bring liquidity to the benchmark 10-year government bond, which had recently gone untraded for two days. Yield curve control has driven the yen sharply lower, adding inflationary pressure in a country that needs to import many basics like food and energy. To counter the yen’s precipitous drop,
last Thursday Japan intervened to prop up its currency for the first time in 24 years.
Developments that could help turn the tide: A move toward policy normalization within Japan. Separately, diminished U.S. inflation and less aggressive Fed hikes would likely take some pressure off the BoJ. - China and other emerging markets. China, the largest EM and the world’s second-largest economy overall, is perpetuating its untenable zero-Covid policy, dragging down both domestic growth and contributions to the global economic recovery. The continued potential for major production zones such as Shanghai to be shut down adds to uncertainty and the risk of further economic pain.
Developments that could help turn the tide: More clarity on China’s policy intentions and evidence of economic progress. Elsewhere in EM, nascent bright spots in Latin America, notably Brazil (which sends nearly half of its crude oil exports to China), could foster confidence in that region’s valuations.
- Europe. The energy crisis and war in Ukraine are the most obvious disruptors of economic activity. Germany has nationalized a major power company and plans to ration energy to stretch reserves, which will limit industrial output. Additionally, the European Central Bank has just started raising rates, putting it far behind both the Bank of England and the U.S. Federal Reserve, especially after another aggressive U.S. hike last week (Figure 2). These factors outweigh the positives of bolstered energy reserves and fiscal stimulus. Stimulus will help consumers but likely exacerbate inflation, which is on the rise and not expected to ease any time soon.
We see far more headwinds than tailwinds to justify establishing or adding to non-U.S. equity allocations.
Portfolio considerations:
For now, we advocate underweighting non-U.S. equities as part of a strategic asset allocation, due to the lack of positive catalysts in key markets. At the same time, we will continue to monitor all markets with the conviction that compelling absolute and relative value opportunities, and not just value traps, will eventually present themselves and warrant serious investment consideration.
We will continue to monitor all markets with the conviction that compelling absolute and relative value opportunities, and not just value traps, will eventually present themselves.
Nuveen’s Global Investment Committee (GIC) brings together the most senior investors from across our platform of core and specialist capabilities, including all public and private markets.
Regular meetings of the GIC lead to published outlooks that offer:
- macro and asset class views that gain consensus among our investors
- insights from thematic “deep dive” discussions by the GIC and guest experts (markets, risk, geopolitics, demographics, etc.)
- guidance on how to turn our insights into action via regular commentary and communications
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Endnotes
Sources
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