The Bottom Line
- Outside the U.S., value stocks significantly outperformed their growth counterparts for the 12-month period ending July 31, 2017, as measured by the MSCI All Country World Excluding US Value and Growth indexes.1
- That’s a major reversal of the trend that’s prevailed over the past decade and particularly during the last 3 years, when international growth stocks held a notable performance advantage.
- Could this be the start of a long overdue comeback for international value?
- If you accept the premise that comparative performance tends to eventually gravitate back to the long-term average (i.e. reversion to the mean), this looks like a likely possibility. That’s because over a long period of time, international value has outperformed international growth2, not the other way around.
- But beyond that principle, there’s also the reality that the beginning of the end is now in sight for the extraordinary monetary accommodation that has helped fuel growth’s outperformance in recent years.
- Improving global economic growth may help value’s case, too—since in principle it favors earnings growth in cyclical sectors—such as Financials and Energy, as well as commodity-producing companies—which comprise much more of the international value index than the international growth index.
- The converse is true as well; if defensive (non-cyclical) sectors like Consumer Staples underperform as growth accelerates—and/or if investors were to shy away from more highly valued tech companies—then that could also favor international value, because the growth index has much heavier exposure to those areas.
- Europe is also likely to play a notable role in any comeback for international value as it is heavily exposed to energy- and commodity-producing companies as well as financials.
- To learn more about the tailwinds that could drive international value stocks, read the latest from ClearBridge Portfolio Manager Safa Muhtaseb.
1 Source for all data is Bloomberg. For the 12-month period ending 7/31/17, the MSCI All Country World Excluding US Value Index generated a total return of 22.9% compared with just 16.2% for the MSCI All Country World Excluding US Growth Index. In the U.S., the Russell 1000 Growth Index generated a total return of 17.9% compared with 13.7% for the Russell 1000 Value Index.
2 For the 20-year period ending 7/31/2017, the MSCI All Country World Excluding US Value Index generated a total average annual return of 5.52% compared with 4.13% for the MSCI All Country World Excluding US Growth Index.