PERSPECTIVE3-5 min to read

What makes the case for international equities and value?

It’s impossible to pinpoint the best time to diversify your investments but, after extended outperformance by US growth stocks, now is probably not the worst time to consider it.

22/01/2021
international-flags

Authors

Daniel Woodbridge
Fund Manager, Quantitative Equity Product

The narrow breadth of the US market has been a feature of the past few years. This has been mainly due to the phenomenal success of the US tech giants. There’s no denying that, so far, there has been no good time to bet against their success continuing. But this does raise the question how much further this trend can go on.

US outperformance reflects preference for growth over value

The rise of US mega-cap tech has been part of a change in style performance in international markets too, not just in the US. Our analysis shows that over the long run, as measured from the 1990s to Q2 2020, cheap high-quality stocks performed well, returning 6.7% on average, and expensive low quality stocks did not, returning -8.6%.

This is the relationship between valuation, quality and returns that one would intuitively expect. However, there have been growing signs in recent years of this relationship breaking down as investors sought higher growth regardless of quality.

That breakdown has become quite extreme. For example, looking just at Q2 2020, expensive low-quality stocks significantly outperformed expensive high-quality stocks. Cheap stocks have been left behind.

In general, we don’t think this pattern of investors paying more for lower quality can be sustained in the long run.

Value investing works better in international markets

Investors could choose to diversify into value stocks but keep their exposure within the US. However, value investing has historically worked better in international markets than in the US.

Of course, past performance doesn’t always translate into future performance, but there are two ways to think about this. Firstly, if you were explicitly looking to invest in value today, then ex-US equities could be an interesting space to add that exposure. Secondly, if you were explicitly looking to add international exposure to diversify away from the rich valuations of the US market and declining US dollar, then the value style in international equities could be considered.

Could now be the time to diversify?

We would re-iterate that we’re not looking to predict the future, but we can remember some lessons from the past. It may not seem like it right now, but international equities have regularly outperformed the US for significant periods of time. They also offer diversification.

There are several reasons why we think now is probably not a bad time to gain exposure to non-US equities. Recent US outperformance has been led by US mega-cap tech stocks. The success of these companies is well heralded and well deserved; however, they are richly valued and expectations are high, leaving them vulnerable to disappointment.

Meanwhile, international equities, and the value style in particular, are offering record discounts to their benchmarks and appear to be in a zone that could be considered mispriced. A significant opportunity may be available if one can identify cheap stocks with quality characteristics, such as good business fundamentals and good financial strength.

Important Information

The contents of this document may not be reproduced or distributed in any manner without prior permission.

This document is intended to be for information purposes only and it is not intended as promotional material in any respect nor is it to be construed as any solicitation and offering to buy or sell any investment products. The views and opinions contained herein are those of the author(s), and do not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds. The material is not intended to provide, and should not be relied on for investment advice or recommendation. Any security(ies) mentioned above is for illustrative purpose only, not a recommendation to invest or divest. Opinions stated are valid as of the date of this document and are subject to change without notice. Information herein and information from third party are believed to be reliable, but Schroder Investment Management (Hong Kong) Limited does not warrant its completeness or accuracy.

Investment involves risks. Past performance and any forecasts are not necessarily a guide to future or likely performance. You should remember that the value of investments can go down as well as up and is not guaranteed. You may not get back the full amount invested. Derivatives carry a high degree of risk. Exchange rate changes may cause the value of the overseas investments to rise or fall. If investment returns are not denominated in HKD/USD, US/HK dollar-based investors are exposed to exchange rate fluctuations. Please refer to the relevant offering document including the risk factors for further details.

This material has not been reviewed by the SFC. Issued by Schroder Investment Management (Hong Kong) Limited.

Authors

Daniel Woodbridge
Fund Manager, Quantitative Equity Product

Topics

Follow us

Contact Us

Level 33, Two Pacific Place, 88 Queensway, Hong Kong

(852) 2521 1633

Online enquiry: Please complete the web form below and we will reply as soon as possible.

Contact us

The investments mentioned in this website may not be suitable to all investors. The information contained in this website is provided for reference only and does not constitute any investment advice. Investors are advised to seek independent advice before making any investment decision.

Investment involves risk. Past performance is not indicative of future performance. You should remember that the value of investments can go down as well as up and is not guaranteed. You may not get back the full amount invested. Please refer to the relevant offering document including the risk factors.

This website is intended for Hong Kong residents only. Non-Hong Kong residents are responsible for observing all applicable laws and regulations of their relevant jurisdictions before proceeding to access the information contained herein. Schroder Investment Management (Hong Kong) Limited is regulated by the SFC. The website (excluding Schroder Provident Plan related pages) has not been reviewed by the SFC.

The website is issued by Schroder Investment Management (Hong Kong) Limited.

Important notice: Schroders does not make unsolicited requests through emails, calls, messages, WhatsApp, WeChat, Facebook, Instagram applications. Any contact other than via Schroders’ official channels for personal or financial information is likely to be false and fraudulent. Please stay vigilant and refer to our Fraud Alert Notice for further details. If you have doubts about the person, platforms, websites or institutions that claim to be associated with Schroders, please contact us via (852) 2521 1633 and inform the local police.