Saturday, 10 September 2011

Attractively valued investments and Long Valuation Waves

The current bear market cycle is being driven primarily by sovereign default concerns and associated deterioration in economic data out of Europe. Pan-European bailouts of PIIGS countries look increasingly unlikely. Inevitably 3 or 4 of the distressed countries will default. Greek 1 yr bonds already yield > 95% so the market tells us that such defaults will start fairly soon. As Iceland's recent return to the bond markets has shown, a default is great way for indebted nations to restart their economies. Austerity will only lead to further distress.

Other European countries will be forced to recapitalize their banks due to these defaults. That should lead to an easing of credit conditions and lead to an earnings recovery out the current correction cycle, as happened when the US bailed out its distressed banks. Whenever the current bear cycle ends, there will be more than a few bargains on offer, as there were in March 2009. 

Below are a few articles that I recently came across. They recommend a few undervalued western stock market investments. Most of the value investing homework has been done for you by this authors in the articles. When an end to the turmoil is in sight allocating some capital to a basket of a dozen or so stocks (that fit your investment profile - value or growth) out of the 25-30 mentioned in the articles below ought to provide good returns for many years ahead. 

1. Undervalued growth stocks for the long term:
2. Undervalued dividend stocks for income:
3. High profile industrials for stability:
4. Resource Royalty Companies as a hedge:

Note that although these stocks are already attractively priced (the P/E ratios of most of these stocks are in the low teens) long-term valuation cycles tend to mark the end of bear markets with P/E ratios in the 6 to 8 region. 

To help you navigate these long term investment cycles here is an excellent article (from back in late 2007 before the financial crisis):

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