Our Outlook for the Stock Market

In an overall fairly valued market, it's time to be selective

Heather Brilliant, CFA 3 April, 2013 | 6:38PM
  • With its recent rally, the stock market is now trading just below fair value, with stocks under Morningstar coverage trading at 97% of fair value, using a market-capitalisation-weighted average. This is quite a bit higher than last quarter, when our coverage universe was trading at 92% of fair value.
  • We have seen correlations among asset classes start to come down (albeit from very high levels), which bolsters our view stated last quarter, that we think investors focusing on specific stock opportunities should do well given this backdrop.
  • Supporting our view that markets will continue to decouple, economic and market performance has meaningfully diverged during the first quarter. The US economy continues to show improvement, while Europe's weakness persists, and uncertainty in Asia has dragged market performance down in that region.

 

Global equity markets continued their march upward in the first quarter, making undervalued stocks all that much more challenging to find. Our overall coverage universe is trading at 97% of fair value, based on a market-cap-weighted average. Within that, our US coverage is the most expensive, trading at 99% of fair value, followed by Europe at 96% of fair value; Asia is the least expensive at 93% of fair value.

These recent discrepancies in valuation across regions are largely due to stock price changes in the regions as opposed to changes in our underlying valuations. In the first quarter to date, we have seen the S&P 500 rise more than 9%, far outpacing the roughly 3% improvement in Europe or 4% decline in Asia (excluding Japan).

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The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

About Author

Heather Brilliant, CFA  Heather Brilliant, CFA, is the vice president of Global Equity and Credit Research at Morningstar.

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