Which international markets might be best now?
Our last two messages looked at the views of value expert Jeremy Gratham who is a Boston-based money manager to which institutions and individuals have entrusted $22 billion. He is one of the most respected U.S. fund managers and is best known for his acumen in relative values represented by different asset classes and markets worldwide. See “Cash in on Timber” and “Smart Investors Agree”.
This message looks at major equity markets around the world and shows which offer the best value now!
The international weighting in Gratham's portfolio is getting less expensive than the U.S. portion of his investments and he explained why by saying that the numbers suggest that foreign markets are substantially overpriced but much less so than the U.S. market now.
Gratham feels that international large-cap value can probably give a real return of 4%, and U.S. large-cap value only 1.5%. This includes Europe and Asia but not emerging countries.
He feels that emerging countries are quite different and we'll see why later.
But the question we answer here is which major overrseas markets might be best now?To get this answer we turned to our friend and eClubadvisor Michael Keppler of Keppler Asset management Inc.. Michael is the king of value strategies and his top value major market strategy is used by State Street Bank and Trust (one of the worlds largest fund managers) to manage their offshore top value mutual funds.
Michael compares every major market monthly looking at their current book to price, cash flow to price, earnings to price, average dividend yield, return on equity and cash flow return on equity compared to their average and relative vales and compares them to all other markets. Based on this research he determines which markets offer top value (buy candidates), low value (sell candidates) and which are neutral. This top value strategy since 1984 to June 2001 has averaged an annual compound return of 21.0% per annum compared to 13.1% for the benchmark MSCI World Index.
Keppler's current valuations are:
Buy Candidates - Top Value Major Markets: Austria Belgium Germany Hong Kong Norway Sell Candidates Low Value Major Markets: Canada Denmark France Italy Netherlands Sweden Switzerland USA Neutrally Rated Markets Australia Japan Singapore Spain United Kingdom
During the month Australia was downgraded from a top value to neutral rating.
So what does all this suggest? First Gratham suggests that investing in major overseas markets offers more than 2.5 times return potential than investing in Wall Street at this time. Keppler suggests that these odds are even better if the overseas investing is targeted in Austria, Belgium, Germany, Hong Kong and Norway.
I suggest this only makes sense for those who are truly comfortable investing in shares and if they enjoy looking at markets abroad. After all analysis is said and done, we should still personalize our investing to fit our nature along with our particular wants, needs and desires.
Plus keep in mind that it makes sense to:
1. Invest only in what we like 2. Invest only with people we trust 3. Buy businesses, not stocks 4. Invest only in what we understand 5. Don't over diversify 6. Keep looking for new opportunities 7. Buy businesses we plan to keep for life 8. Look for businesses that are available at a good price
In addition keep a PIEC (Personal income Earning Corridor) three phase strategy in mind. The first phase concentrates investing in our own income earning activity. But we should not put all our money in just our own business (though at times we may as this is the best place to risk). Diversification is normally the best practice though.PIEC portfolios come in three layers of diversification, first our own activity, then a second layer of very safe investments and finally the third layer of speculative deals. For most of us these equity investments fit in this third layer.
In my humble opinion the majority of PIEC diversification at this time should be in stodgy, liquid investments such as utilities, CDs and bonds. These investments may pay little in the short term, but are safe and they are highly liquid at a known price. However, if you genuinely love researching and tracking the market and have the mentality, capital and experience for it, just being an investor can be a wonderful first layer PIEC business in itself.
The third layer of diversification can be speculative because modern portfolio theory suggests that safe investments are enhanced and made safer by adding a small amount of higher risk deals such as overseas and emerging shares and emerging debt such as in Argentina. This also allows us to fulfill any casino mentality we might have.
PIEC investing makes it easier to create and keep wealth. It enhances our lifestyles now, because it lets us make money being who we really are. It makes life more fulfilling and fun.
Whether you are employed or have your own business, becoming a PIEC investor can help you get the most, in money and fun, out of your life.On the subject of risk, tomorrow's message will look at the top value emerging markets. These may offer the best value of all.
Jeremy Gratham feels that they are special because they have had their bloodbath. The index of the whole emerging equity market trades at a multiple of 8.5 times earnings. It should probably be 15 or 16 like major markets. So sooner or later he feels that is going to be 15 or 16 times earnings, just as sooner or later the U.S. market is going to be at a 17 times earnings. This means that these markets may offer the greatest opportunity of all.
Until next message good global investing and business!
Gary A. Scott