International Equities: A Developing “Value” Story

Based on historical trends, International Equities are cheaper than U.S. stocks. For the ten-year period between 2006 and 2016, the MSCI EAFE and the S&P 500 indices saw price-to-earnings (PE) multiples trade nearly in lockstep. The PE multiples, however, started to de-couple in 2017 and, today, the S&P 500 trades more than 5 turns higher than its international counterpart.

Entry Points

While value, alone, may suggest the timing is right for international exposures, company fundamentals and business momentum offer compelling proof points. Analysis into prices, earnings, capital positions and currencies help make the case that the time is right for institutional investors to allocate to international equities.

Catalysts in Play:

Positive business momentum can be found in the form of an improving earnings environment. Since 2006, on average, the percentage of international companies, represented by the MSCI EAFE Index, exceeding quarterly guidance stood at just under 55%. More recently, in the past few quarters, over 70% of international companies are reporting positive earnings surprises, on average, while forward-looking earnings estimates generally are being hiked higher. 

Other variables indicate these patterns should endure:

• Historically Cheaper | It’s not merely that current PE multiples of international names are by and large trailing their U.S. counterparts; forward price-to-earnings ratios based on forecasted EBITDA also suggest the international index is notably cheaper. The delta compared to domestic equities is more attractive among international small- and mid-cap stocks, which should benefit actively managed strategies.
• Flush with Cash | Beyond just the positive earnings momentum, many international companies are improving their cash positions, particularly in Europe. From an investment perspective, balance sheet growth often translates into shareholder-friendly initiatives, such as stock-repurchase programs and increased dividends. As confidence in an economic recovery takes hold, this could be another catalyst for stock prices.
• Currency Diversification | Of course, currency diversification is another benefit of international equity exposures. This has particularly been the case during periods of U.S. dollar weakness, when the MSCI EAFE historically outperformed its domestic counterpart. Given the money-supply growth in the U.S. since the onset of the pandemic — far outpacing other major currencies — the downward pressure on the U.S. dollar could provide another tailwind favoring international stocks.

Active Strategy: Boston Partners has been investing in global and international equities since 2004, and currently manages international equity and both long-only and long/short global and emerging market strategies, each of which apply Boston Partners’ time-tested “three-circle” approach to fundamental analysis and stock selection.

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Boston Partners Global Investors, Inc. (“Boston Partners”) is an investment adviser registered with the SEC under the Investment Advisers Act of 1940. Registration does not imply a certain level of skill or training. The views expressed in this commentary reflect those of the author as of the date of this commentary. Any such views are subject to change at any time based on market and other conditions and Boston Partners disclaims any responsibility to update such views. Past performance is not an indication of future results. Discussions of securities, market returns, and trends are not intended to be a forecast of future events or returns.