Global CIO Commentary by Scott Minerd
U.S. equities have some upside, but investors seeking to maximize returns during the coming period of synchronous global growth should focus on opportunities elsewhere. The total market capitalization of U.S. stocks now exceeds 100 percent of GDP – a level typically associated with full valuation – so it appears that European and Asian equities are better positioned for gains over the next year.
The outlook is extremely favorable for Europe, where systemic risk has largely dissipated. European Central Bank President Mario Draghi has made clear that the ECB will do what is needed for an orderly financial sector restructuring. Peripheral economies now have access to capital markets thanks to lower interest rates and are enjoying an improving fiscal outlook. Lower unit labor costs are also helping periphery nations export their way to a stronger recovery. Improving economic fundamentals will soon flow through to earnings in periphery nations, and equities in larger economies such as Spain and Italy, hard hit during the crisis, could see the most substantial gains.
A simultaneous economic expansion in the United States and Europe should support growth in China. The total market capitalization of Chinese stocks as a percentage of GDP is close to its previous low in late 2008 and more than 60 percent below its 2007 peak, giving Chinese equities highly attractive valuations. Ultra accommodative monetary policy in Japan will likely continue to bolster output there in the short-run.
Attractive Equity Valuations in Peripheral and Eastern Europe
With continued monetary easing around the world and signs of a synchronous global expansion taking root, countries that were particularly hard hit over the past few years now present potentially attractive opportunities. Measured by market capitalization as a percent of GDP, Eastern Europe and smaller euro zone peripheral countries now appear to be the most undervalued of major regions worldwide. Major peripheral countries in the euro zone (Greece, Ireland, Italy, Portugal, and Spain) are also below their average level of market cap to GDP over the past 10 years, indicating further room for equity returns, compared to other developed markets. Emerging markets that suffered selloffs over the past few months also remain undervalued, including India, China, and South America.
MARKET CAPITALIZATION TO GDP: % DEVIATION FROM 10-YEAR AVERAGE
Source: Bloomberg, Haver, Guggenheim Investments. Data as of 3Q2013 for market cap, 2Q2013 for GDP. Other EM includes Turkey, Mexico, Korea, Hong Kong, and Taiwan. Southeast Asia includes Malaysia, Philippines, Singapore, Thailand and Indonesia. Other DM includes Australia, Canada, UK, and Switzerland. Euro zone core includes Germany, France, Netherlands, and Finland. South America includes Brazil, Argentina, Peru, Colombia, and Chile. Eastern Europe includes Poland, Czech Republic, Ukraine, Hungary, Bulgaria, Croatia, Latvia, Lithuania, Romania, and Russia. Other Periphery includes Slovenia, Estonia, Slovakia, Malta, and Cyprus.
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*Assets under management is as of 12.31.2018 and includes leverage of $12.4bn. Guggenheim Investments represents the investment management businesses of Guggenheim Partners, LLC ("Guggenheim"), which includes Security Investors, LLC ("SI"), Guggenheim Funds Investment Advisors, LLC, ("GFIA") and Guggenheim Partners Investment Management ("GPIM") the investment advisers to the referenced funds. Securities offered through Guggenheim Funds Distributors, LLC, an affiliate of Guggenheim, SI, GFIA and GPIM.
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