CONTRIBUTORS
Christian Correa, CFA
President & Chief Investment Officer
Franklin Mutual Series
There are reasons for optimism that value stocks can continue to perform well over the coming months as the global economy remains strong and the group benefits from several long-term structural trends, according to Franklin Mutual Series.
With a solidly growing global economy, stable inflation and strong employment, the current environment for global value stocks continues to look favorable to us. Factor in structural trends such as reshoring, infrastructure investment, and electrification, and we believe the value outlook becomes even more appealing over the longer term.
Economic strength, value vigor
The global economy continues to hum. After worrying about a potential recession in late 2023 and early 2024, the economy has been expanding, and even pressure on lower-end US consumers may be starting to abate.
According to data from the US Federal Reserve,1 the rate of increase in credit card delinquencies, for one, began to ease in the first quarter of 2024, as seen in Exhibit 1. Other industry data also suggests early signs of improvement.
Exhibit 1: Delinquency Rate on Credit Card Loans May Be Leveling Out
(Percent, seasonally adjusted)
January 1991–March 2024
Source: Board of Governors of the Federal Reserve System. As of March 2024.
Global growth, meanwhile, should stay at about 3.2% for this year and next, according to estimates from the International Monetary Fund.2 This solid expansion should keep labor markets tight and consumers spending. For retailers, the challenge is likely to be stocking the stuff consumers want, in our view.
Meanwhile, inflation remains elevated but is well off its worst levels. After years when inflation failed to hit 2%, we believe the recent above-trend inflation rate, while painful for some, may just be the long-term trend levelling out. Furthermore, rents, which have continued to rise and have fed into higher inflation,3 could begin to come down as more apartment buildings are completed4 over time, potentially reducing overall inflation.
So long as inflation isn’t wildly high, we are optimistic about its continued normalization. And after the European Central Bank cut rates in June, we anticipate that interest rates in the United States can eventually move a bit lower as well, a possible positive for value-oriented companies.
When interest rates do begin to fall, we believe it should be an added positive for the US housing market, where mortgage rates have been stubbornly high despite steady 10-year Treasury yields. (See Exhibit 2.) This disparity has dampened sales activity, with existing home sales at a 4.1 million annual rate in April down from 4.22 million a year earlier, according to the National Association of Realtors.5 New home sales, as reported by the US Commerce Department,6 have also weakened in recent months. And that weakness is keeping a lid on areas that supply the homebuilding and housing industries.
Exhibit 2: The Spread Between 30-Year Mortgage Rates and 10-Year Treasury Yields Remains High
June 2014–June 2024
Source: FactSet. As of June 2024. See www.franklintempletondatasources.com for additional data provider information.
Overall, we believe that the economic environment remains favorable for value investors, even after the recent broadening out of the US stock market advance beyond the Magnificent Seven technology stocks.7 And with appealing valuations, we believe solid long-term returns for value stocks are achievable. Knowing where to look and what long-term trends to keep an eye on are going to be crucial, however.
Value is international
European and Japanese stocks are one place to seek value over the coming quarters, in our view. Europe, for one, has been unloved as investors continue to pile into US technology stocks. But it boasts some truly innovative companies, and the regional economy has largely managed to overcome the energy market challenges Russia’s war in Ukraine posed by shifting suppliers and ramping up energy efficiency. Economic expansion has been steady, and inflation appears to us to be abating.
Japan is also slowly changing and is finally luring back international investors. A return of wage and goods inflation and important corporate governance reforms have brightened the prospects for Japanese stocks, in our view. Not all companies are embracing change, but we expect those that do can unlock value for investors over time.
Non-US value stocks have largely outperformed non-US growth companies over much of the past year, when looking at the MSCI EAFE Growth and Value Indexes (See Exhibit 3). We believe there are opportunities for this trend to continue.
Exhibit 3: MSCI EAFE Value Is Outperforming EAFE Growth on Relative Basis
June 16, 2023–June 14, 2024
Source: FactSet. The MSCI EAFE Value Index captures large- and mid-cap securities exhibiting overall value style characteristics across developed markets. The MSCI EAFE Growth Index captures large- and mid-cap securities exhibiting overall growth style characteristics across developed markets. Indexes are unmanaged and one cannot directly invest in them. They do not include fees, expenses or sales charges. Past performance is not an indicator or a guarantee of future results. See www.franklintempletondatasources.com for additional data provider information.
Long-term value
Further out, we believe value stocks should participate in several structural trends, including supply chain reshoring, infrastructure investment, electrification, and even artificial intelligence.
Supply-chain reshoring has been ongoing for a few years and looks set to continue, as Western countries look to move their supply chains away from China and build resiliency into their supplier networks. This move should continue to support investment in new manufacturing facilities and new shipping routes, all potential benefits to the value firms that operate in these markets.
Additionally, global infrastructure spending on things from roads and bridges to manufacturing facilities, clean energy and data centers are all going to require the stuff value companies tend to produce—copper, cement, industrial equipment, HVAC systems and professional and staffing services.
Electrification is also a positive long-term value investing trend as the world embraces electric vehicles and other electricity-powered equipment like residential heat pumps, which require not only more power generation, but charging infrastructure, new parts and semiconductors.
Value stocks may still not get the hype their growthier counterparts do, but value companies will be critical parts of global economic development and investment over the next few years. And as such, we believe value stocks can continue to prove their worth.
Endnotes
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Source: “Charge-off and Delinquency Rates on Loans and Leases at Commercial Banks.” Federal Reserve. First quarter 2024.
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Source: “World Economic Outlook.” International Monetary Fund. April 2024. There is no assurance that any estimate, forecast or projection will be realized.
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Source: US Consumer Price Index. Bureau of Labor Statistics. May 2024.
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Source: US Monthly New Residential Construction. US Census Bureau. April 2024.
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“Existing Home Sales Retreated 1.9% in April.” National Association of Realtors. April 2024.
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Source: US Monthly New Residential Sales. US Census Bureau. April 2024.
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The “Magnificent Seven” stocks refer to Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla.
WHAT ARE THE RISKS?
All investments involve risks, including possible loss of principal.
Equity securities are subject to price fluctuation and possible loss of principal.
International investments are subject to special risks, including currency fluctuations and social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets.
Value securities may not increase in price as anticipated or may decline further in value. Growth or value as an investment style may become out of favor, which may have a negative impact on performance.
Active management does not ensure gains or protect against market declines.