By Pax World Chief Investment Officer, Chris Brown
Company fundamentals have gathered little attention in this macro driven, risk-on/risk-off market. How long will it be before headlines about Europe or China’s economy stop dominating investors’ psyches? As we all know, macro events and their impact on the markets have been increasing over the years due to globalization. This is something investors and portfolio managers have had to contend with and will continue to do so, as our world increasingly becomes an economy of one. To put things into perspective, the major market indices have had a tremendous move upward since the March 2008 lows, particularly here in the U.S. Performing this feat has not been easy, especially given the constant negative news about the U.S. housing market, the embattled consumer, a troubled banking system, not to mention events in Japan (nuclear disaster), the European Union (EU) and China. One has to wonder where the market would be today if investors were exposed to a string of good news. My explanation is that historically, equities climb a “wall of worry” and we believe this scenario will continue to play out in the second half of 2012. We acknowledge that the situation in Europe is far from over, and China is starting to show signs of a slowdown.
Against this backdrop, we nevertheless believe that equity markets are generally attractively valued. At Pax World, company fundamentals and valuations continue to matter and we believe they should continue to reward investors, especially in light of historically high cash levels and the strength of corporate America’s balance sheet. U.S. housing prices have stabilized and the significant drop in energy prices is a major stimulus for U.S. households.
As for the rest of the world, the recent policy moves in Europe appear to demonstrate that the EU is beginning to understand and acknowledge the magnitude of the situation they face, and are a step in the right direction toward containing the crisis. Emerging markets look attractive, especially economies with low private sector debt and government regulation.
In a low interest rate environment, we believe high-yield bonds should remain attractive, especially relative to investment grade bonds. We expect bonds in general to provide muted returns for the remainder of the year.
The statements and opinions expressed are those of the author as of the date of this report. All information is historical and not indicative of future results and subject to change. This information is not a recommendation to buy or sell any security. Past performance does not guarantee future results.