Part of being a contrarian investor means taking the long view when others fixate on the here and now. Sometimes a prolonged slump in a sector or market can make a patient approach difficult to follow. We’ve found, however, focusing on the fundamentals goes a long way in reinforcing our discipline. That’s why the chart below has us excited. Based on normalized price-to-earnings ratios, the future looks bright for those investing internationally.
Across various developed markets, companies are trading at 16x normalized earnings—a discount of 30% to the group’s historic average. The disparity is even more compelling when global equities are viewed against their domestic counterparts. By this measure, the discount is nearly 36%.
Some of the gap, we believe, reflects nagging uncertainty in Europe tied to Brexit fallout, and the effects of below average growth in China. However, valuing a business based on normalized earnings allows investors to make apple-to-apple comparisons across an economic cycle. We favor this approach because as long-term investors, we believe pursuing attractive valuations, whether they are found in the U.S. or abroad, is the cornerstone of generating alpha over the long-term.
Past performance does not guarantee future results.
Investing involves risk, including the potential loss of principal. There is no guarantee that a particular investment strategy will be successful. Value investments are subject to the risk that their intrinsic values may not be recognized by the broad market.
The statements and opinions expressed in this article are those of the presenter(s). Any discussion of investments and investment strategies represents the presenter’s views as of the date created and are subject to change without notice. The opinions expressed are for general information only and are not intended to provide specific advice or recommendations for any individual. Any forecasts may not prove to be true.
Economic predictions are based on estimates and are subject to change.
Foreign investing involves special risks such as currency fluctuations and political uncertainty.
Definitions: Alpha: is a risk-adjusted measure of a portfolio's annual return in excess of the market return. It is a measure of a portfolio manager's contribution to performance due to security selection. A positive alpha indicates the portfolio outperformed the market on a risk-adjusted basis, and a negative alpha indicates the portfolio performed worse than the market. Brexit: is an abbreviation of "British exit", which refers to the June 23, 2016 referendum by British voters to exit the European Union. The referendum roiled global markets, including currencies, causing the British pound to fall to its lowest level in decades. Prime Minister David Cameron, who supported the UK remaining in the EU announced he would step down in October. Earnings Per Share: is the portion of a company’s profit allocated to each outstanding share of common stock. Normalized Earnings: are earnings adjusted for cyclical ups and downs in the economy. Price/Earnings Ratio: of a stock is calculated by dividing the current price of the stock by its trailing or its forward 12 months’ earnings per share. Morgan Stanley Capital International EAFE Index: is a market capitalization weighted index composed of companies representative of the market structure of 21 Developed Market countries in Europe, Australasia, and the Far East. S&P 500 Index: is an index of 500 U.S. stocks chosen for market size, liquidity and industry group representation and is a widely used U.S. equity benchmark. All indices are unmanaged. It is not possible to invest directly in an index.
Michael Jolin is a registered representative of ALPS Distributors, Inc. The Heartland Funds are distributed by ALPS Distributors, Inc.
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