Investors may be surprised to learn that equity markets posted solid returns for 2012 despite the now-familiar concerns—the U.S. election, the Eurozone sovereign debt crisis and slowdown in China—that made it feel like a down year. In fact, as you can see from this week’s OppChart, the MSCI All Country World Index has actually rallied sharply in three of the last four years. Yet, over the same time period, investors have been pulling money out of equity mutual funds. Overall, for the four-year period ended 12/31/12, the MSCI All Country World Index posted an average annual return of 14.35%, yet investors sold nearly $300 billion of equity mutual funds.¹ Investor sentiment surveys suggest that excessive caution may be the driving force behind these flows. Investors, hampered by macro concerns, don’t believe the rally.

As 2013 gets underway, this elevated risk aversion has left valuations attractive in many asset classes. The earnings yield² on U.S. stocks is substantially higher than the yield on the 10-year U.S. Treasury, suggesting that stocks may be a much more attractive prospect than government treasuries in the coming years, albeit a greater risk.³ Within the equity universe, growth stocks appear especially attractive as shares of fast-growing companies around the global are trading at virtually no premium to their slower growing counterparts.³ Europe, for example, presents a unique opportunity for long-term investors to buy healthy companies that are trading at unsustainably low valuations due mainly to Europe’s macro troubles. Emerging markets may also provide continued opportunities in 2013, especially as growth in China reaccelerates. While I hesitate to lump all emerging markets together, it’s worth noting that in aggregate, valuations appear attractive.

1. Bloomberg, Investment Company Institute (ICI), 12/31/12. Note: Equity mutual fund flows only through 12/26/12 and numbers for 12/5-12/26 are preliminary estimates from ICI.
2. The earnings yield is calculated as earnings divided by price, or the inverse of the price-to-earnings ratio.
3. FactSet, 12/31/12.

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The MSCI All Country World Index is designed to measure the equity market performance of developed and emerging markets.

The 10-year U.S. Treasury Yield is generally considered to be a barometer for long-term interest rates.

Each index is unmanaged and cannot be purchased directly by investors. Index performance is shown for illustrative purposes only and does not predict or depict the performance of any Oppenheimer fund. Past performance does not guarantee future performance.

Foreign investments may be volatile and involve additional expenses and special risks, including currency fluctuations, foreign taxes and political and economic uncertainties. Emerging and developing market investments may be especially volatile.