Content provided by Paula Wieck, CLS Manager of Investment Research
I have three little girls, one who is starting the first grade this year. I don’t know about you, but my inbox has been flooded with “Last Chance to Save for Back-to-School” ads. Of course, being the value shopper I am, there’s no way I’m going to pay full prices for supplies or clothes, especially when my six-year old beauty will outgrow them in only a matter of months. Not to mention, my daughter can be a bit forgetful, losing hairbands, socks, bracelets, even shoes! No way, Jose – I’m not paying full price.
I manage my portfolios much the same way – I try to buy securities that are on sale. I’m not only a value shopper, but I’m a value investor as well. This is a seemingly obvious, intuitive concept – buy low, sell high, but you’d be surprised at how emotions can inhibit investors’ rationale. For example, I spoke at a client seminar recently, discussing the opportunities in international equities, particularly those in Europe, and the crowd’s mood shifted. They squirmed uncomfortably, not understanding how I could even consider allocating their hard-earned money to a region that has experienced so much turmoil over the last few years.
My rebuttal? Europe is on sale, and the sale may not last long! Italy and Spain are near the cheapest levels seen in the last 30 years, and as a whole, European equities are still one of the cheapest indices in the world. But could it be a value trap? Will Europe sit in your metaphorical closet and go out of style, becoming almost worthless, or will it be on the fashion runway in just a short period of time?
We think Europe will hit the fashion runway, so-to-speak. Business and consumer confidence has picked up, and should continue to improve. This last week, the Eurozone’s GDP rose 0.3 percent in the second quarter, surpassing the projected 0.2 percent growth. This brought an end to six straight quarters of contraction. In addition, economic data has been surprising to the upside, relative to consensus expectations.
Many of us on the portfolio management team have been adding exposure to Europe on price weakness (days it’s been on sale) in an effort to add value for our portfolios. Europe is beginning to show strong signs of exuberance, and with prices like these, we think it poses as a great buying opportunity.
Now if you’re like the squeamish clients I spoke to, you may still feel like you’d rather stay invested in what you know – the good old USA. My argument, however, is that the combination of U.S. and international stocks has produced superior long-term risk-adjusted returns because of the assets’ lower correlations with each other. Adding international stocks, particularly those that are showing good value and growth potential like those of European countries, will aid in diversifying the portfolio while reducing its risk.
So as you scan the ads this back-to-school season, I encourage you to not pay full price for your kids’ school clothes and supplies. Take advantage of the sales while they last, because they won’t last forever. I encourage you to do the same with your portfolios.