Stock Market Outlook: Global Equities Are Starting to Look Attractive

Amid political turmoil around the world, the Morningstar Global Markets Index dropped 14% in the fourth quarter to Dec. 20, leaving the broad measure 10% below where it had started 2018.

From a bottom-up perspective, global equities are beginning to look attractive. The median stock across our 1,500-plus coverage trades at a 14% discount to our estimate of fair value. Entering the fourth quarter, we had pegged the typical stock as fairly valued. Not surprisingly, we also see more strong buying opportunities, with 6% of our coverage trading at 5 stars, up from 2% a few months ago.

• Following a plunge in oil prices, the energy sector now ranks among the most attractive. But because U.S. shale production is likely to limit the long-term upside to oil prices, we think investors are more likely to find value in the less-price-sensitive areas of the sector, namely midstream and refining.
• Technology is another area where a sharp drop in shares has rendered a once-overpriced sector more palatable. Here, we think semiconductor stocks are the best bet. While the near-term outlook is weak after a couple years of tremendous growth, secularly growing demand for processing power, connectivity, and sensing capabilities in a wide variety of devices bodes well for the long term

Sector Outlooks

Basic Materials: Fewer Buying Opportunities Than in Most Sectors Communication Services: Attractive, Sustainable Yields on Offer Consumer Cyclical: Firms That Blur the Lines of Digital and Physical Are Set to Excel Consumer Defensive: Meaningful Opportunity in Tobacco Energy: A Drop in Oil Prices Has Made Energy Stocks More Attractive Financial Services: Value in Banking and Asset Management Firms Healthcare: Specter of ACA Repeal Hangs Over Fairly Valued Sector Industrials: Trade Tensions Lead to Attractive Valuations Real Estate: Only a Few Opportunities in Fairly-Valued Sector Technology: Semiconductor, Software Firms On Sale Utilities: Investors Once Again Treating U.S. Utilities as a Safe Haven