Revival of Global Titans: The Renaissance of International Value Investing

As Franklin Mutual Series suggests, the world of global investing is about to undergo a sea change. After years of lagging behind the tech-centric US market, international value stocks are showing signs of a revival. Decades of low interest rates, minimal inflation, and substantial central bank support have boosted US growth stocks to towering heights. However, the companies that fuel the traditional global economy – those international enterprises involved in finance, construction, and power – appear to be in the early stages of overtaking US firms that once dominated market performance.

Companies within traditional value markets like Europe and Japan are back in the spotlight, offering not only attractive valuations but also promising economic exposure to both the US and emerging markets. Their appeal is likely to be further buoyed by recent government spending initiatives.

International Leaders Under the Radar

For US investors, international stocks have often been a secondary consideration due to home-country bias. This bias often leads to an undue emphasis on domestic companies, thereby overlooking leading international companies simply because they are listed in Europe or Asia.

Many of these overlooked non-US companies lead their respective industries, spanning sectors from luxury goods, advanced auto components, and pharmaceuticals to consumer products, banking, machinery, industrial equipment, and payments. They are pioneers in the digital realm, reaping the benefits of digitalization, machine learning, and artificial intelligence to enhance productivity across multiple sectors.

Moreover, international markets are less efficient than the US stock market, implying a scarcity of analyst coverage for these top-tier companies. The result? More inefficient pricing and a wider valuation gap between US and non-US companies. For discerning investors ready to undertake thorough fundamental analysis, this is a gold mine waiting to be tapped.

Bargain Hunting in International Markets

A significant valuation gap has emerged, fueled by the US investors’ preference for homegrown companies and a decade-long influx into US-centric technology stocks. The aftermath? International stocks now offer significant bargain opportunities.

The valuation disparity suggests promising potential for non-US companies’ valuations to improve over time. Additional tailwinds, such as more favorable interest-rate regime and a modest inflationary environment, typically benefit value-oriented companies. Historically, value stocks tend to outperform growth stocks as interest rates rise, often better positioned to pass higher costs onto customers.

Furthermore, individual Asian and European markets’ valuations currently lie well below their mean and the range observed over the past 15 years, suggesting ample room for growth. On the other hand, the US equity market appears more expensive in comparison, with possibly less potential upside.

The MSCI EAFE Value Index, representing international value stocks, is currently at a 10-year low valuation multiple, presenting a potential upside for investors willing to undertake detailed fundamental research.

Global Exposure through Non-US Firms

International stocks do not only come with attractive valuations but also offer exposure to both the stability of the US economy and several fast-growing emerging markets. Data suggests that about a fifth of all MSCI EAFE Index revenue is generated in the United States, while another 20% originates from emerging and frontier markets.

Emerging markets, projected to contribute to 60% of global gross domestic product growth, serve as significant drivers of the world economy. For investors eager for the growth potential of emerging markets without the associated risks, international investing is a fitting solution.

A Lift from Government Spending

International companies are poised to gain from vast government spending initiatives implemented over recent years. As the US and European Union (EU) seek to secure their supply chains and lean towards greener economies, international industrials, energy, and materials companies are expected to be the primary beneficiaries.

With clean energy investments expected to reach about US$1.7 trillion this year, European companies focused on green energy and renewable power initiatives stand to reap substantial benefits. Meanwhile, Japan’s improving governance policies could result in a heightened focus on shareholder returns, suggesting the possibility of improved business returns and potentially larger share repurchases over time.

In conclusion, with their attractive fundamentals, cheap valuations, and global reach, European and Asian stock markets present enticing opportunities for value investors. As the pendulum swings back towards international value investing, having a profound understanding of company valuations and potential value-unlocking mechanisms is crucial to capitalizing on these hidden gems.