Why Invest Outside the US

September 2024 – For Professional Investors Only

Printable Version    Listen to Podcast

CHEAPNESS OF NON-US VALUE STOCKS

Across the global investment universe, a large valuation disparity remains between US and non-US markets. Non-US stocks are not only trading at a significant price-to-earnings (P/E) discount to US stocks, but they are also trading at the lower end of their forward P/E range over the past 15-years, while US stocks are trading toward the top of their range for the same period (Exhibit 1).

DISCONNECT BETWEEN EARNINGS AND MARKET CAP

The stark valuation difference between US and non-US stocks invites investigation of the prolonged underperformance outside the US. Since February 2009, non-US equities’ annual earnings have risen by $1.6 trillion while adding $28.3 trillion in market capitalization. In contrast, earnings of US equities rose by $1.3 trillion and added $45.8 trillion in market capitalization during the same period (Exhibit 2). While non-US equities have delivered solid earnings, their share prices have not been rewarded commensurately.

Disaggregating the so-called “Magnificent 7”, which made up approximately one-third of the market cap and earnings gains, from the rest of the US makes the disparity even more striking. Excluding the Magnificent 7, the market cap of US equities has risen just 8% more than non-US equities since the end of the Global Financial Crisis in 2009, while generating a hefty 44% less in earnings growth. Essentially, the existence of the Magnificent 7 is the main reason we have seen a pro-US cycle over the past 15 years.

GET MORE FOR YOUR MONEY IN NON-US STOCKS

While US and non-US equities are priced much differently today, non-US equities have the same historical return on equity and slightly lower historical revenue growth when compared to the US market (Exhibit 3). However, non-US equities trade at a discount of 40%. We believe this makes it a particularly good time to add non-US stocks to a diversified portfolio.

__________________________________________________________________________________________________________

In this episode of our Pzena Perspectives podcast, Co-CIO John Goetz and Director of National Accounts Peter W. Quinn discuss why diversifying beyond the US makes sense.

Listen to Podcast