Talk about the land of confusion. The VIX is at eight-year lows, despite a slew of geopolitical concerns. Stocks are at record highs. Spanish debt yields less than Treasurys.
How, then, is one of the world’s biggest investors navigating this market?
Dan Morris is global investment strategist at TIAA-CREF, the asset management company with $569 billion in assets under management, sat down with Talking Numbers for an exclusive interview.
The Low VIX
“A very low reading on the VIX is kind of reflecting on the relatively benign environment for equities generally,” Morris said. “We think it’s too low, just if you look at the historical numbers. It’s going to go up but not in a way that we see as really threatening at all.”
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“Even if the VIX does go up [and] even if we do get some type of correction,” added Morris, “the market has been a bit too smooth. If you look at the long-term pattern of equities, you get a lot more volatility than this but nothing like a serious correction.”
Yields on the Spanish government’s 10-year bond have dipped below that of the U.S. While Spain’s economy has grown for the last three quarters, its GDP has contracted over the last several years and is still smaller than in 2006.
Spain’s low yields–along with those of other peripheral European economies like Italy– reflect a pessimistic outlook, according to Morris. That’s because the nominal yield is really a combination of the real rate of interest plus the expected inflation rate. Economies facing low growth usually can see low expected inflation. Morris anticipates low growth and low inflation (though not deflation) in many European countries.
“We think growth in a lot of Europe in general – Spain and Italy, etc. – is going to be low,” said Morris, explaining why nominal yields in many European countries have fallen. “You don’t have much inflation to add on top of that low real yield.”
Morris sees a better story for the United States. “We still like the U.S.,” he said. “Valuations compared to Europe are about the same, so there’s no real valuation disadvantage in the U.S. And, earnings growth still looks reasonably good.”
But emerging markets may be even more rewarding to investors, according to Morris.
“In terms of real valuation opportunities that would suggest higher potential returns further on, emerging markets are looking attractive,” Morris said. “It’s still a bit of a challenging environment. You have tapering as potentially going to upset currencies for emerging markets, and that hits equities as well. But, they’re trading at a fairly high discount. So, if you have a slightly longer-term horizon, we think that they’re also quite good opportunities in a lot of emerging markets.”