Although everyone loves a bargain, they are often very hard to find. Usually, the best time to find a bargain is when a product is out of favor with buyers. In retailing, when an item is the wrong color, style or size, it is thrown into the bargain bin. Its price is then successively marked down until the product is finally cleared out. Astute buyers willing to take a chance on an unwanted item may discover that they snagged a great deal when it returns to favor the next season.
As evidenced by the roller coaster ride of the investment markets over the past decade, investments also go “on sale’’ when buyers don’t like their “style” at a given time. In early 2009, many investments were out of style due to concerns about the banking system and the economy. Over the past five years, however, these worries have faded and most investment prices have risen sharply. The news media is now featuring stories about rising housing prices and stocks hitting new highs. As a result, investors may wonder, “Are there any investment bargains left?”
The investment strategists at Thrivent Financial believe that despite the rise in the financial markets, there are three investment areas that are currently in the” bargain bin.” Although these investments have been recently “marked down,” it appears that the selling in these sectors may be overdone. Thrivent suggests that if investors are willing to consider these currently underappreciated areas, they may be able to profit when these investments come back into “style.”
According to Thrivent, the investments to possibly consider include:
As a result of the well-publicized fiscal problems of a few municipalities (Detroit, Chicago and Puerto Rico), many investors have sold off their municipal bond investments. This wholesale selling has put pressure on the entire sector, driving prices down on both high and low quality bonds alike. Although high quality municipal bonds usually provide lower yields than Treasury securities and are certainly not without risk, they are now offering yields that are typically 13 to 15 percent higher than their taxable counterparts. Thrivent believes that these bonds are particularly attractive for investors in higher tax brackets given the recent rise in tax rates. For investors in the highest brackets, municipal bonds are offering taxable equivalent yields approximating 10 percent.
According to Thrivent, floating rate bank loans represent another potential bargain even with the risk of interest rate fluctuation considered. As concerns over a change in Federal Reserve policy prompted a rise in interest rates over the summer, most fixed income investments have declined in value. Generally, when interest rates rise, prices of fixed income investments decline. High yield bonds, which have been a popular income investment, are of lower credit quality and considered to be of higher risk in a rising interest rate environment. Short-term money market funds are also unattractive at current levels due to extremely low yields. By comparison, high-quality floating rate bank loans are currently yielding 5 percent and their yields reset at higher levels when interest rates rise.
Thrivent believes that European equities are currently trading at bargain levels relative to their domestic counterparts. As the broad U. S. equity market has risen by over 20 percent in 2012, the shares of many American based companies appear to be fairly priced. Investors seem convinced that the U. S economy is improving and prospects for companies here are good. This is despite the fact that over 40 percent of the earnings for the S & P 500 companies are generated overseas.
While large European companies often derive their sales from the same international markets, investors have been unwilling to bid up their shares until an economic recovery in the region is fully visible. As a result, despite similar business fundamentals, European stocks are trading at an earnings multiple of 9X, well below their historical average of 13X. Generally, this compares favorably to the current earnings multiple of 16X for domestic stocks. European stocks are also yielding 3 percent, which compares favorably with the 2 percent yield available on U. S. equity markets. Be sure to talk to a financial professional though as foreign investments involve additional risks including greater political, economic and market instability; different accounting standards; and currency fluctuations.
As with all bargains, individual municipal bond, bank loan and European issues can be difficult or impossible for individual investors to find. Consequently, a professionally managed portfolio or mutual fund may be another option, to consider as they offer a way to participate in these “marked down” sectors. Professional managers are constantly monitoring the markets and searching for “good deals.” Similar to shopping at retail, individuals may profit from the assistance of a professional investment shopper. Consider them your “personal shopper,” if you will. Regardless if you choose this option or shop on your own, it is important to talk with a financial professional for their insight into how these investments fit with your risk tolerance and overall financial goals.
In their Market Commentary, Thrivent Asset Management leaders discuss the financial markets, the economy and their respective effects on investors. Writers’ opinions are their own and do not necessarily reflect that of Thrivent Financial for Lutherans or its members. Forecasts, estimates and certain other information contained herein are based upon proprietary research and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. From time to time, to illustrate a point, they may make reference to asset classes or portfolios they oversee at a macro-economic level. They are not recommending or endorsing the purchase of any individual security. Asset management services provided by Thrivent Asset Management, LLC, a wholly owned subsidiary of Thrivent Financial for Lutherans. Securities and investment advisory services are offered through Thrivent Investment Management Inc., 625 Fourth Ave. S., Minneapolis, MN 55415, a FINRA and SIPC member and a wholly owned subsidiary of Thrivent Financial for Lutherans. Past performance is not a guarantee of future result.
About Thrivent Financial for Lutherans
Thrivent Financial for Lutherans is a faith-based, Fortune 500 financial services membership organization helping its nearly 2.5 million members to be wise with money and to live generous lives. Thrivent Financial and its affiliates offer a broad range of financial products and services. As a not-for-profit organization, Thrivent Financial joins with its members to create and support national outreach programs and activities that help congregations, schools, charitable organizations and individuals in need. For more information, visit Thrivent.com. Also, you can find the company on Facebook and Twitter.