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Why Invest Outside the US

September 2024 – For Professional Investors Only

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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.

FURTHER INFORMATION

This document is intended solely for informational purposes. The views expressed reflect the current views of Pzena Investment Management (“PIM”) as of the date hereof and are subject to change. PIM is a registered investment adviser registered with the United States Securities and Exchange Commission. PIM does not undertake to advise you of any changes in the views expressed herein. There is no guarantee that any projection, forecast, or opinion in this material will be realized. Past performance is not indicative of future results.

All investments involve risk, including loss of principal. The price of equity securities may rise or fall because of economic or political changes or changes in a company’s financial condition, sometimes rapidly or unpredictably. Investments in foreign securities involve political, economic and currency risks, greater volatility and differences in accounting methods. These risks are greater for investments in Emerging Markets. Investments in small-cap or mid-cap companies involve additional risks such as limited liquidity and greater volatility than larger companies. PIM’s strategies emphasize a “value” style of investing, which targets undervalued companies with characteristics for improved valuations. This style of investing is subject to the risk that the valuations never improve or that returns on “value” securities may not move in tandem with the returns on other styles of investing or the stock market in general.

This document does not constitute a current or past recommendation, an offer, or solicitation of an offer to purchase any securities or provide investment advisory services and should not be construed as such. The information contained herein is general in nature and does not constitute legal, tax, or investment advice. PIM does not make any warranty, express or implied, as to the information’s accuracy or completeness. Prospective investors are encouraged to consult their own professional advisers as to the implications of making an investment in any securities or investment advisory services.

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