WSJ: Where to Exit the Market Herd

By SIMON CONSTABLE
Going with the crowd might have helped in high school, but it’s not necessarily a good investing tactic. With that in mind here are three contrarian investment plays.
Europe’s a Mess, So Invest ThereWith few exceptions (the United Kingdom being one) the European Union is looking weak. The specter of deflation looms across the continent, a phenomenon of falling prices that cripples growth. On top of that, unemployment remains high and terrorists recently attacked the heart of France.
From an investment point of view, what’s not to hate? Not much. It’s at just such times that stock valuations look attractive. “Investors have the opportunity to buy into a relatively cheap market with positive earnings momentum,” according to Russell Investments 2015 Annual Global Outlook. Because of that they suggest betting more money on the region.
Stocks in the eurozone region are much cheaper and have bigger dividends than U.S. stocks. The Russell Eurozone Index, which tracks stocks in the currency area, traded at about 14 times 2015 forecast earnings and yields 3.1% as of year-end, according to Russell Investments. That compares with the Russell 1000, which tracks large-cap U.S. stocks, trades at about 16 times forecast earnings and yields 1.9%, says Russell.


On top of that, the European Central Bank looks increasingly likely to start a stimulus program similar to the Federal Reserve’s recently ended one.
Investors might consider the iShares Europe (IEV) exchange-traded fund, which seeks to track the S&P Europe 350 Index by holding a basket of European stocks.
Yes, Oil Keeps Falling, But It Can’t Fall Forever
Anyone who’s filled up the gasoline tank lately knows that oil prices have collapsed, falling to $46 a barrel recently, more than halving in six months. Oversupply is crushing prices.
Yet major producers, such as Saudi Arabia, seem reluctant to turn off the spigot. How long will it take before someone blinks and how low will prices have to fall?
Sounds like a recipe for disaster, so why even bother?
At least one firm thinks 2015 could see a bounce. McAlinden Research Partners has “high conviction” energy will be among the S&P’s top- performing sectors by year’s end. “Oil prices below $50 are unsustainable and will need to rebound at some point,” according to a recent research report from McAlinden.
Exactly how long will depend on a change in investor psychology, which may already be beginning.
The price is approaching bottom, believes Woody Dorsey, president of Vermont-based investment research firm Market Semiotics. “The psyche of investors has shifted.”
Individual investors should avoid buying oil-futures contracts, which can be very risky. Instead, look at oil stocks or the United States Oil Fund LP ETF (USO), which tracks the price of the U.S. crude-oil benchmark, West Texas Intermediate light-sweet crude.
Oil Sank Junk Bonds, But Yields Are Way Up
The oil-price plunge has also dragged down the so-called junk-bond market, which has lent heavily to the oil patch. Overall, corporate borrowers with less-than-perfect credit have seen the cost of borrowing rise by about a third since July. The worry: Lower oil prices may mean the loans won’t be repaid.
Sounds like a trashy investment. Maybe not.
Outside of the energy sector, junk bonds are “a phenomenal buy,” says Matt Freund, chief investment officer of USAA Mutual Funds. Nominal yields are now around 6.7%, way up from the 5.3% in the middle of last year, according to Bank of America Merrill Lynch U.S. High Yield index.
Mr. Freund also points out that as yields on junk debt have increased, the so-called risk-free cost of borrowing, as represented by the 10-year U.S. Treasury note, has actually fallen. That makes junk even more attractive relative to government bonds.
Investors looking for a trade might want to consider the SPDR Barclays High Yield Bond ETF (JNK) or the Pimco High Yield Fund A (PHDAX).
See original story here.
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