Kaylie Pferten claims that international stocks outside of America's expensive market are good deals
The global equity markets are undergoing an intriguing transition. Investors are turning their attention from US stocks to stocks in other countries. Though demand for other regions is also increasing, emerging markets are driving the trend. The trend can be partially attributed to valuation. According to Steve Nguyen, fundamental portfolio manager at US investment management firm Causeway Capital, the valuation premium of US stocks was more than "three standard deviations over the long-term average since 1970" last year.
"Despite the poor performance of the United States against... When compared to other countries this year, the US valuation premium remains within two standard deviations. European stocks, as indicated by the MSCI Europe index, are heavily discounted in comparison to their US counterparts (using the MSCI USA index as a benchmark) following 17 years of poor performance. Their price/earnings (p/e) ratio for the next two years is 13 (MSCI Europe), while the US index's is 21.
The disparity is even more pronounced in emerging markets. They have underperformed developed market stocks by 55% since the start of 2021, according to JPMorgan. The difference increases to 200 percent if you go back to 2010. The performance of Chinaor rather, its lack thereofis largely to blame for this. Nonetheless, JPMorgan has noted that interest in Chinese stocks is growing outside of the nation's dominant technology sector. While there are still many issues facing China's economy, policymakers are beginning to move away from regulation and toward economic stimulation at home.
When compared to developed markets, emerging markets are generally trading one standard deviation below the 20-year average, according to JPMorgan. They have only ever been this affordable once before, after 2000, when Asian financial markets were still recuperating from the combined effects of the .com bust and the 1997 Asian financial crisis. In terms of price-to-book, emerging markets are trading at 0.5 of book value, the lowest level since 2000 (the ratio dropped to 0.3 between 1997 and 1998), one standard deviation below the 30-year average.
Analysts say emerging markets are cheap and underowned. This suggests room for a sentiment and valuation recovery. Greece, the Philippines, Brazil, Korea, India, and the United Arab Emirates are all favorites of the JPMorgan team. The latter play is intriguing. Given that the economy is expected to grow by 2% this year and that tourism will offset any tariffs, the bank notes that investors can expect a 10% shareholder yield from the nation's once-distressed banks.
Locating value in international stock markets.
International markets find the valuation story very compelling. Murray International Trust (LSE: MYI) co-manager Martin Connaghan observes that "compelling valuation support in Europe and emerging markets, particularly in Latin America and Asia" is possible. At much lower valuations, investors can still access many of the same structural growth themes that are present in the US, he continues.
The reality is more complex, according to Connaghan, even though some nations may now appear to be on the verge of instability due to Donald Trump's trade war. "Take into account the nature of the company. For instance, IT service companies like Infosys and Tata are less directly impacted by high tariffs on physical goods in India. The same tariffs do not apply to their software, cloud, and consulting offerings.
For investors, small caps offer an additional opportunity. Despite facing the same macroeconomic challenges as large caps, small caps have produced comparatively strong returns over the last five years. The MSCI International Small Cap index has performed 250 basis points better each year than the MSCI International index (both ex-US).
"Smaller businesses are typically more focused on their home market, which can shield them from some of the challenges associated with doing business internationally," Connaghan says. According to Nguyen, the current valuation is at a slight discount, even though over the previous 20 years, international small caps have traded at a premium to international mid and large caps.
When it came to implementing buybacks, US management teams used to be far ahead of their foreign counterparts. However, in recent years, buybacks have increased in places like Japan, Europe, and the UK. Accordingly, total shareholder return yields are now frequently "significantly higher outside of the US while the UK total yield is now more than double that of the US," he continues.
The Italian financial services company Intesa Sanpaolo serves as an illustration. Intesa, the top Italian domestic bank, was just added to Murray's portfolio. Its dividend yield is 7%, its cost-to-income ratio is less than 40%, and its common equity Tier 1 capital ratio is 14%. The Scottish American Investment Company (LSE: SAIN), which has an 86 percent allocation to global equities with the remaining portion going to infrastructure, bonds, and real estate, is among the top trusts to play global value in addition to Murray International. Dividend yields of three to four percent are provided by JPMorgan Global Growth and Income (LSE: JGGI) and STS Global Income and Growth (LSE: STS).
Over the past ten years, region-specific trusts have generated the highest returns in the global small-cap industry. Options include the JPMorgan US Smaller Companies Investment Trust (LSE: JUSC), which has outperformed the small-cap benchmark Russell 2000 index by 0.5 percent annually over the last ten years, and the European Smaller Companies Trust (LSE: ESCT), which has outperformed its sector by 41% over the last five years. Consider investing in Japan through the Nippon Active Value Fund (LSE: NAVF).
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