International Value Investing Makes a Comeback

After years of lagging behind the tech-heavy US market, Franklin Mutual Series sees international value stocks coming back into the spotlight over the coming years as the traditional economy comes into sharper focus.

Global investing is facing a sea change. After a decade of low-interest rates, slight inflation, and plenty of central bank support pushing US growth stocks to dizzying heights, international value stocks now look to us to be in the early days of a revival as these trends reverse. The international companies that finance, build and power the traditional global economy are overtaking the US firms that had dominated market performance. Companies in the more conventional value markets like Europe and Japan are back in style. Not only are these leading firms attractively valued, in our view, but they also offer economic exposure to both US and emerging markets and can benefit from recent government spending initiatives.

International companies are leading firms

For many US-based investors, international stocks can often be an afterthought. This home-country bias means that US investors ignore some of the leading companies in their fields that just happen to be listed in Europe or Asia in favor of their US equivalents.

Many of these non-US companies are at the forefront of industries such as luxury goods, advanced auto components, pharmaceuticals, consumer products, banking, machinery and industrial equipment, and payments. Technological advances are reverberating through many of these industries and the benefits of digitization, machine learning, and artificial intelligence are increasingly driving productivity improvements beyond just the technology sector.

Additionally, international markets tend to be less efficient than the US stock market, meaning these best-in-class companies may have fewer analysts covering them, and information on them may be less readily available. Fewer analysts doing high-quality research can lead to more inefficient pricing, creating a valuation gap between US and non-US companies. Investors willing to do greater fundamental analysis can identify attractive investments that others might overlook. And with less investor and analyst focus, international markets can be a catalyst-rich hunting ground for finding undervalued stocks with the potential to unlock value for shareholders over time.