Despite Selloff, Odds Still Favor Equities: Nomura
Asian shares were in the redon Friday, after investors were disappointed that the Federal Reserve Chairman Ben Bernanke didn’t hint at another round of monetary easing. However, Michael Kurtz, Global Head of Equity Strategy at Nomura is unfazed, saying over the medium-term, equities remain the asset class most likely to succeed.
He said the earnings yield of the MSCI World Equity Index is currently around 9.5 percent, which is 800 basis points more than the 1.5 percent yield on 10-year benchmark Treasurys.
Kurtz adds that the spread has historically been 330 basis points. "That means investors are giving away 800 basis points of prospective returns, simply to get a bit of safety. We think it's too much to pay," Kurtz told CNBC's "Capital Connection" on Friday.
He admits that volatility in the equity markets will continue given the fears over a euro zone breakup. "We expect Europe to get worse before getting better. It has to get worse, to force policymakers to do the right thing," he added.
Still, for investors looking beyond the next 2-3 months, the odds are clearly tilted in favor of equities, said Kurtz.
Kurtz also likes to play contrarian. He is overweight on European markets, which are caught in the middle of the debt-crisis storm. Stock markets in Spain and Italy, for example have fallen more than 35 percent over the past 12 months.
"Looking at valuations right now, (European) stocks are pricing in not only a breakup of the euro zone, but also risk of the failure to contain the contagion in financial markets and the banking system," said Kurtz.
However, policymakers are not likely to let that worst-case scenario come to pass, which mean a positive surprise for markets could happen in the months ahead in the form of a stimulus, he said.
Kurtz is also overweight on Emerging Asian countries, including China. He expects Beijing to do more, in addition to the 25 basis points rate cutlate Thursday.
"One of the most positive surprises in 2012 so far is that China is not paralyzed with political infighting before the big leadership transition later this year," he said.
"Instead, they're moving quickly with financial reforms and capital liberalization, and that bodes well for efficient capital allocation. And if that comes to pass, it will remove the risk premium attached to China's stocks that we've seen in the past several years," Kurtz added.