Geopolitical developments of late may be having little or no injurious effect on the capital markets of the world's most mature economies.
In fact, if anything, they have triggered considerable risk aversion that is apparent in significant investment flows of a safe-haven nature into the credit markets of the U.S., the UK, the eurozone and Switzerland. Regardless of repeated warnings from the Federal Reserve and the Bank of England of impending credit tightening sometime this year or next, declining bond yield trends of the advanced markets show no sign of reversing even in reaction to the most calamitous occurrences — like the flagrant July 17 attack on a civilian Malaysian airliner above the disputed territory in Eastern Ukraine.
(What about bonds? Amid global turmoil, bond managers' patience is tested)
With the Israeli naval and aerial assault on July 8 followed by the ground offensive on Gaza beginning July 18, as well as the insurrections in Libya and Iraq, these events have seen yields dive double digits in 10-year U.S. Treasuries and U.K. gilts in addition to eurozone and Swiss bonds of the same duration. Meanwhile, the U.S. stock market has soared to record highs, rising 1.5% since the end of June, as Swiss and U.K. shares increased nearly 1% apiece and euro-bloc shares posted a mere fractional loss.
Absolute and relative equity valuations would appear to present a favorable opinion for overweighting Russian shares in the aggregate. At a one-year forward, positive-adjusted 4.9 times price/earnings multiple (p/e), Russia's stock market is cheap when compared with its record high (72.3 times), all-time low (7.4 times), and its historical average (zero). Even on a relative basis, the country's shares are undervalued by 0.20 points in terms of its bellwether, MSCI's Eastern Europe, Middle East, and Africa (EEMEA) index. Notwithstanding comparatively inexpensive valuations, the murky macroeconomic and policymaking outlook — coupled with an isolationist foreign policy tendency — trumps the discount on Russian equities in support of retaining an underweighted exposure.
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Israeli stocks pose an entirely different opportunity for investors. Even though the military campaign in Gaza is likely to cost upwards of 0.2% of national GDP, a relatively quick recovery in real economic growth is foreseen once the IDF completes its mission and withdraws from Gaza. Continued disinflationary pressures and low joblessness should sustain private consumption, which — in conjunction with an anticipated faster pace of increase in gross fixed capital formation owing to low credit costs and a projected rebound in exports thanks to the shekel's stable depreciation since July 2012 — should energize domestic and foreign demand in spite of a slowdown in public spending this year and next.
Trading at 11.3 times one-year forward, positive-adjusted earnings, Israeli equities are only 1.9 points in excess of their record low of 9.4 times and well below the all-time high and historical average of 31.8 times and 17.2 times, in that order. Yet relative valuations would seem to favor an underweighting of Israeli share holdings because of their 0.69 point premium against their MSCI EEMEA bellwether. All the same, improving macroeconomic prospects and a sound policymaking environment more than qualify Israeli stocks for an overweight irrespective of the mixed messages telegraphed by the market's absolute and relative valuations.
Todd Rosenbluth and John Krey are from S&P CapitalIQ