SBH Investment Summit
Fourth Quarter 2023:
International/Global

Are Non-U.S. Stocks Poised for Outperformance?

Large valuation differences between U.S. and non-U.S. stocks have presented an opportunity for investors to diversify portfolios by adding international holdings.

Scott Decatur, Ph.D., Director of Quantitative Strategies, and Suresh Rajagopal, CFA, Director of All Cap Strategies, Director of ESG Research, discuss where they are finding value in non-U.S. stocks relative to history.

 

Key Takeaways

  • International stock markets have begun to outperform U.S. markets, suggesting the long run of U.S. dominance could be ending as we enter a new cycle favoring international markets.
  • International markets currently offer an attractive opportunity to buy high quality stocks trading at historic discounts, providing diversification at a time when expensive growth stocks have been dominating the U.S. market.
  • We believe investing in discounted, high quality international companies will provide long-term upside for client portfolios amidst continuing market volatility.

[Dan McCormack] Today we are going to focus on non-U.S. and global market opportunities. Scott, last time we chatted, you pointed out the relatively outsized opportunity set within non-U.S. developed and emerging markets. How has that played out for investors, and do you still see value there?

[Scott Decatur] We see those large valuation differences presenting opportunity for investors to diversify and include more non-U.S. holdings in their portfolios. What we now see was not always the case. In fact, a decade ago, valuations favored U.S. stocks and that subsequently played out well for U.S. stocks for many years, leading to where we are today.

[McCormack] Investors have seen these dramatic valuations, but they want to know, when will non-U.S. stocks start winning?

[Decatur] We have started to see this happen already over the last couple of years. If we look back to 2022, the MSCI EAFE Index, the main developed markets large cap index, beat the S&P 500® Index by over 4%, and this year the S&P 500 has been delivering nice returns, but almost all those returns have been driven by a small group of stocks that are now known as the magnificent seven.

When you step back and you look at the rest of the S&P 500, the broader U.S. market, the returns look mediocre with EAFE ahead again by about 4% and EM large caps in line with that broader U.S. market. We cannot just exclude those magnificent seven, but it is important for investors to understand just how narrow any perceived U.S. return dominance really is. When we look at the small cap space, developed market small caps are slightly ahead of the Russell 2000® Index and emerging market small caps are returning almost 10% better than the Russell 2000. These are all promising signs, and we think the period of dominance by non-U.S. markets is just getting started.

These cycles have typically run for about a decade or even longer, and current valuations would seem to confirm that we are early in the upswing for international markets.

[McCormack] How do you feel this current value and quality set of opportunities stacks up relative to history?

[Decatur] Within the international markets, cheaper value stocks are at historically attractive levels versus the market itself. There has been a lot of froth in the markets over the last couple of years, in the exciting expensive growth companies, that is still there. That in turn has created large pockets of opportunity to buy good companies—some might even say boring companies—at great prices.

What is even more interesting is much of this opportunity for stocks of good value is in higher quality stocks. For example, in our international small cap portfolio, stocks are trading at a nearly 40% discount versus the market, but the portfolio companies have roughly a 30% higher profitability level. We see similar situations in each of our strategies, large and small, developed and emerging, where in each case there are large valuation discounts but more profitable companies than their respective markets.

We believe this is a great opportunity to get diversification to go along with an investor’s U.S. equities, while picking up higher quality companies that are trading at depressed levels.

[McCormack] Suresh, a two-part question for you. First, regarding the value opportunities globally, would you agree with Scott’s comments? And then, tell us more about where your team is finding value in the U.S. and overseas markets for your global portfolios?

[Suresh Rajagopal] As the viewers may be aware, the Global strategy invests in both the U.S. and outside the U.S. The portfolio is concentrated from a holding perspective as a stock selection driven strategy, with more of a core growth bias. I would say we invest in developed markets and are currently overweight outside the U.S. relative to the U.S. market and I would agree with Scott on valuations.

We are finding quality companies at a discount on our valuation work and stocks across the market, capitalization, geographic regions, in the U.S., Europe, and the Asia Pacific marketplaces. We are finding companies that are of high quality and trade at a discount to our valuation work, which is important to us. Our belief is that market volatility was caused by higher interest rates, inflation, and the decoupling of the global supply chain. Volatility will continue and we believe investing in quality companies that are at a discount to their valuations will provide long-term upside.

 

Additional Resources:

SBH International Equities Strategies

International Equities Insights

 

The opinions expressed in this video are solely the opinions of Segall Bryant & Hamill or an unaffiliated third party. You should not treat any opinion in this video as specific inducement to make a particular investment or follow a particular strategy, but only as an expression of opinions. The opinions expressed in this video are based upon information considered reliable, but completeness or accuracy is not warranted, and it should not be relied upon as such. Market conditions are subject to change at any time, and no forecast can be guaranteed. Any and all information perceived from this video does not constitute financial, legal, tax, or other professional advice and is not intended as a substitute for consultation with a qualified professional. The opinions and statements are subject to change without notice and Segall Bryant & Hamill is not obligated to update or correct any information in this video. For illustrative purposes only.

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