Most Undervalued Asset Classes, Equity Industries, Segments, And Regions - H2 2024

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Undervalued industries, regions, and equity market segments offer investors the potential for strong, market-beating returns.There are ETFs tracking most of these.An overview of the cheapest sectors ...

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Morgan Guide to the Markets is exactly what it says on the tin: a comprehensive, in-depth guide to global investment markets. It includes a treasure trove of quantitative information regarding U.S. and international equities, bonds, and other investment securities, as well as broader macroeconomic conditions. I've been writing sporadic articles looking at particularly undervalued asset classes/industry segments in the past. This is one such article. Treasuries and higher-quality bonds offer comparatively strong dividend yields right now. I'm bullish on these, although high-yield bonds continue to look good on an absolute basis, still worse than investment grade. U.S. value stocks look particularly cheap right now, much more so than in prior decades. Performance has been somewhere between fair and good these past few years, somewhat volatile. International stocks continue to trade at a sizable discount to U.S. equities. Performance has been mixed to negative, and I'm less optimistic, as I've found few outstanding international stock funds. Energy and real estate are the cheapest industries. Energy has been cheap for quite a while now, due to bearish investor sentiment and unclear long-term prospects. Performance has been strong post-pandemic, albeit extremely volatile. Real estate has been underperforming since the Fed started to hike rates and has become exceedingly cheap these past few months. I wrote a similar article to this earlier in the year. Results since have been mostly negative, but I believe this to be due to timing issues and volatility. As an example, the Avantis US Small Cap Value ETF (AVUV), one of my top value ETFs, has outperformed since inception, for most relevant time periods, and 100% of the times I've covered it. It has underperformed YTD, though. Strong overall results, bad timing on that last article. Most Undervalued Fixed-Income Sector - Investment-Grade Bonds and Treasuries Valuation Analysis Right now, almost all fixed-income securities offer investors strong, above-average yields, as interest rates have risen. JPMorgan Guide to the Markets Spreads have risen by more in some asset classes than others. Let's have a look at these spreads. Investment-grade bonds are highlighted in blue. JPMorgan Guide to the Markets - Table by Author As can be seen above, senior loans have seen their yields increase the most, by a whopping 4.1%. Senior loans are variable rate loans, though, so their dividend yields will decrease as the Federal Reserve (almost certainly) cuts rates later in the rate. Under current Fed guidance, senior loan rates would remain competitive for several years. In my opinion and taking into consideration both current market conditions and Fed guidance, senior loans look a bit cheap, but not as much as ABS, treasuries, and other investment-grade securities. These trade at much higher yields than average too, and dividends should not decline that rapidly as the Fed cuts later in the year. Credit spreads tell a similar story, with these steadily declining since mid-2022. Tight credit spreads mean senior loans are not all that cheap, at least compared to investment-grade securities. Data by YCharts ETFs themselves tell a similar story, with spreads between benchmark high-yield and treasury ETFs at their smallest levels in history. Data by YCharts Senior loans look cheap, discounting likely Federal Reserve cuts. Treasuries and similar investments look cheap full stop. I think both are solid choices, but the latter is definitely the value choice. Performance Analysis Treasuries and investment-grade bonds have posted significant losses since early 2022, due to Federal Reserve hikes. These same losses explain their cheapness. High-yield bonds and t-bills have outperformed. Data by YCharts Treasuries and investment-grade bonds have looked cheap for quite a while, but have only been the cheapest for a few months, if that. Due to this, I would not put too much importance on the losses above. Senior loans looked cheaper before, and they have performed much better. Data by YCharts Treasury and Investment-Grade ETFs Lots of treasury and investment-grade ETFs are adequate choices, including the larger benchmark ETFs:  The Vanguard Total Bond Market Index Fund ETF (BND) for bonds, 3.4% yield. The iShares 7-10 Year Treasury Bond ETF (IEF) for treasuries, 3.3% yield. The iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD) for investment-grade bonds, 4.3% yield.  In my opinion, a couple of investment-grade ETFs are materially stronger than their benchmarks. I'm incredibly bullish on the investment-grade CLO debt ETFs, including the Janus Henderson AAA CLO ETF (JAAA) with a 6.4% yield, last covered here. The Janus Henderson B-BBB CLO ETF (JBBB) with a 7.6% yield is another solid chose, see here. In the fixed-income space, we have the Angel Oak Income ETF (CARY) with a 6.6% yield, covered here. These have tended to outperform in the past, especially JBBB and JAAA. Most Undervalued U.S. Equity Market Segments - Small and Cheap Valuation Analysis U.S. growth stocks effectively always trade with comparatively high valuations, as investors are willing to pay premium prices for strong growth prospects. Growth stocks are generally around 40.9% more expensive than value stocks, rising to 85.2% right now. Valuation gaps peaked in early 2021, and have narrowed since, in fits and starts. JPMorgan Guide to the Markets Notwithstanding the above, only small-cap value stocks trade with historically cheap valuations. Value is incredibly cheap relative to growth, less so relative to history. JPMorgan Guide to the Markets Performance Analysis Growth has been expensive for quite a few years already. Results since then have been mixed, with value significantly outperforming in 2022: Data by YCharts Underperforming in 2023: Data by YCharts Slightly underperforming in 2024: Data by YCharts Small-cap value stocks follow a similar pattern, with more significant underperformance following the regional banking crisis in 2023: Data by YCharts Value ETFs Investors looking for strong funds offering diversified exposure to U.S. value stocks have a wide variety of options. My top three picks are:  The Avantis US Small Cap Value ETF (AVUV), focusing on small-cap value stocks, covered here. The Pacer US Cash Cows 100 ETF (COWZ), focusing on U.S. equities with strong FCF yields, covered here. The Capital Group Dividend Value ETF (CGDV), with a slight value and dividend tilt, covered here.  Of the funds above, AVUV and COWZ have both slightly outperformed since inception. CGDV has significantly outperformed, albeit with a shorter track record. Looking at index ETFs, we have the Vanguard Value Index Fund ETF (VTV) for large-caps, the Vanguard Small-Cap Value Index Fund ETF (VBR) for small-caps. Performance has been materially weaker compared to the funds above, though. Value ETFs tend to have slightly above-average dividend yields, but low on an absolute basis. Income investors might prefer bonds and similar investments. Most Undervalued U.S. Equity Industries - Energy and Real Estate Valuation Analysis Right now, U.S. equities are significantly overvalued on an earnings basis, with two exceptions: energy and real estate. JPMorgan Guide to the Markets Energy has been undervalued for several years now, due to a combination of bearish investor sentiment and uncertain long-term growth prospects. Short-term growth prospects of 2.5% are below-average, but positive, however. Due to the above, the energy industry has decided to return excess cash to shareholders as through buybacks and dividends. Buybacks boost EPS growth by a lot, especially considering prevailing valuations. Dividends are a (comparatively) safe source of returns and favored by many investors. Returning cash to shareholders also somewhat reduces risk, insofar as buybacks and dividends are safer than exploration or capital investments. Industries in long-term decline can generate strong returns by delivering cash to shareholders, as could happen to the energy industry. Real estate has been somewhat undervalued for several years now, but the significant undervaluation is more recent. Real estate prices and valuations started to lag in early 2022, as Federal Reserve hikes led to higher mortgage rates and decreased real estate demand. Real estate could surge as the Federal Reserve cuts rates later in the year, although this is ultimately dependent on Fed actions and market reactions. Performance Analysis Energy has been significantly undervalued for several years. It has outperformed for several years too, especially post-pandemic, but with a ton of volatility. Data by YCharts Real estate has been somewhat undervalued since 2022, due to Federal Reserve hikes. It has significantly underperformed since, which explains their current prices and valuations. Data by YCharts As with investment-grade bonds, real estate is only cheap because of the losses above, so I would not consider said losses to be a deal-breaker or indicative of future weakness. Economic conditions will almost certainly improve as the Fed cuts rates, an easy catalyst for real estate. Energy and Real Estate Funds For energy ETFs, we have the benchmark Energy Select Sector SPDR ETF (XLE), a simple, vanilla choice. Income investors might prefer the Global X MLP & Energy Infrastructure ETF (MLPX), which focuses on midstream energy companies, and sports a growing 4.7% yield. I last covered these ETFs here. For real estate ETFs, we have the benchmark Vanguard Real Estate Index Fund ETF (VNQ), another simple, vanilla choice. I'm partial to the Cohen & Steers REIT CEFs. Of these, only the Cohen & Steers Quality Income Realty Fund (RQI) trades with a discount, of 6.1%, and a strong 7.8% distribution yield. I last covered RQI here. Most Undervalued Equity Region - International Valuation Analysis U.S. equities consistently trade at more expensive valuations than comparable international equities, as investors are willing to pay a premium for the strength, resilience, and stability of the country's economy and corporate sector. International stocks have traded with an average discount of 16.8% these past two decades. Right now, the discount stands at 36.0%, twice its historical average. JPMorgan Guide to the Markets International stocks are very cheap, which could lead to significant capital gains and market-beating returns moving forward. Performance Analysis International stocks have been cheap for several years, during which their performance has been below average. JPMorgan argues international stocks have matched the performance of U.S. equities since around 2022. JPMorgan Guide to the Markets Benchmark international equity ETFs have underperformed, though, across the board. Data by YCharts From prior coverage/experience, most international equity ETFs have underperformed, including those focusing on specific countries, regions, and with different tilts (value, cash flow, etc.). A couple of ETFs have outperformed, at least with good timing, but not most. Overall, I believe the data shows broad-based international equity underperformance, with a couple of exceptions. In my opinion, international equity valuations should lead to outperformance moving forward, even though that has mostly not been the case in the past. Fundamentals do matter long-term, and markets rarely remain irrational for long. International Funds Investors looking for strong funds offering diversified exposure to international equities have a wide variety of options. The Vanguard Total International Stock Index Fund ETF (VXUS) offers exposure to international stocks. It is a simple, vanilla choice. I last covered VXUS here. The Avantis International Equity ETF (AVDV) is an actively-managed ETF focusing on cheaply valued international stocks. AVDV is a bit riskier than VXUS but has performed much better. Income investors might prefer the Vanguard International High Dividend Yield ETF (VYMI), an index fund investing in international equities with an above-average 4.5% yield. I last covered VYMI here. In general, the choices above have underperformed U.S. equities in the recent past. Note that this is not the case in my top U.S. value funds, which have tended to outperform, with lots of volatility. In my opinion, the consistent underperformance of international equities weights on their suitability as investments. At the very least, sentiment seems overwhelmingly, consistently negative, and that is simply not the case for value, energy, real estate, or investment-grade bonds. Conclusion  Undervalued equity market segments and asset classes offer investors the potential for strong, market-beating returns. The asset classes and funds presented here are all undervalued and could outperform in the coming months and years. Hopefully, this article was an interesting, useful, and informative starting point for investors interested in undervalued asset classes and funds.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"","news_rank":0,"symbols":[],"gpt_button":0},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.1","shortVersion":"4.29.1","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2455132418"}