Evidence shows that the yield-curve slope and equity returns provide signals of similar direction in the economy, allowing investors to nowcast with relative confidence. Today, those signals indicate that several developed markets—in particular, Japan, Germany, and the United States—are ominously close to entering a correction phase.
A rational analysis of the emerging markets affirms our belief that now is the time to buy, not sell. The panic being peddled by pundits today is simply not justified.
When the value trade goes global, investors are poised to benefit. Evidence from the international equity, bond, currency, and commodity markets indicates that the value premium is a global phenomenon that can offer important portfolio diversification. However, the devil is in the details: we argue that the successful implementation of global value strategies critically depends on an economically motivated design.
A 10-year US Treasury note yielding just little above 2% does feel expensive. Yet we should not be misled by appearances. Our research shows that, contrary to common wisdom, Treasury bonds are only moderately overvalued. All in all, bonds are not as unattractive as a simple historical comparison of their yields may suggest.
Macroeconomic volatility is a useful tool for contrarian investors who are seeking fair value in an equity market characterized by continually rising valuations.