CONTRIBUTORS
Mandana Hormozi
Portfolio Manager, Research Analyst
Franklin Mutual Series
Tim Rankin, CFA
Portfolio Manager & Research Analyst,
Franklin Mutual Series,
United States
Time to break out the passport. After years when US investors were content to stay almost exclusively within their home market, recent gyrations in US tech stocks, growing US policy uncertainty, and a revival in both Europe and Japan, where value companies tend to be more prevalent, have made overseas markets more alluring. As we see it, international stocks’ appealing valuations, rebounding economic activity and a greater focus on shareholder returns warrant more US investor attention.
Value overseas: The fundamental case
While US equities have far outperformed their international counterparts over the past five years, we are starting to see international equities make up some ground in early 2025. And international value stocks have performed well compared to US value stocks. (See Exhibit 1.)
We expect this strength to continue as European economic growth begins to pick up and Japanese inflation and growth returns; we believe the appealing relative valuations between non-US and US value stocks are too attractive for US investors to ignore. (See Exhibit 2)
Exhibit 1: International Value Stocks Close the Performance Gap in 2025
March 31, 2024–April 21, 2025
Source: FactSet. The MSCI USA Value Index captures large and mid-cap US securities exhibiting overall value style characteristics. The MSCI EAFE Value Index captures large and mid-cap securities exhibiting overall value style characteristics across Developed Markets countries around the world, excluding the US and Canada. 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.
Exhibit 2: International Stocks Still Trade at a Substantial Discount to US Stocks
Next 12-Month Price/Earnings Ratio: MSCI EAFE Value Index vs. MSCI USA Value Index
March 31, 2010–March 31, 2025
Source: FactSet. 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.
A return to economic dynamism: The macro case
Signs that US exceptionalism may be ending could further narrow the valuation gap. Tariff uncertainty, for one, is creating more volatile and less predictable financial markets. And a weakening US dollar has historically signaled better non-US stock market performance. (See Exhibit 3.)
Exhibit 3: A Weaker US Dollar Has Tended to Lead to International Equity Outperformance
US Dollar Index vs. MSCI USA-MSCI EAFE Relative Total Returns
December 31, 1974–March 31, 2025
Sources: Bloomberg, MSCI. The US dollar index measures of the value of the US dollar relative to a basket of six foreign currencies: the euro, the Japanese yen, British pound sterling, Canadian dollar, Swedish krona and Swiss franc., 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.
Meanwhile, Europe and Japan are boosting their own economies. Germany’s recently approved infrastructure and defense spending, both outside of existing debt limits, may force other European countries to follow suit. Faster economic growth in Germany, Europe’s largest economy, would be positive for the region overall even if other countries do not spend as much in the coming years. (See Exhibit 4.)
Exhibit 4: International Economic Growth May Get a Boost
Gross Domestic Product Growth in Percent (E-estimated)
Source: International Monetary Fund. There is no assurance that any estimate, forecast or projection will be realized.
We believe Europe still has plenty of work to do to improve its economic growth rate and boost competitiveness. Former European Central Bank (ECB) Chief Mario Draghi’s 2024 report on regional competitiveness calls for more spending on infrastructure, defense, electrification and research and development. If enacted, we believe the job creation and industrial production that follows could benefit the region economically over time. (See Exhibit 5.)
Exhibit 5: Increases in European Infrastructure Spending Should Support Value Companies
European Union Civil Engineering and Non-Residential Construction Activity
2015–2024
Source: European Construction Industry Federation.
As European spending increases, value industries, from cement and asphalt firms to rail and rail equipment companies, as well as power equipment, construction and commercial vehicle companies, could all benefit.
Monetary stimulus may further boost growth. With inflation near the ECB’s 2% target, the central bank has room to cut interest rates, thereby loosening financial conditions and providing added economic benefits.
The Japanese economic story has also been improving. After years of deflation and anemic growth, recent wage increases and resulting inflationary pressures are reviving the moribund economy and sparking a new period of economic dynamism.
Overall inflation has been climbing in recent months as higher wages give consumers more spending power, pushing prices higher. (See Exhibit 6.) Coupled with growing tourism, we should see domestic Japanese companies benefit over the medium term.
Exhibit 6: Japanese Consumer Prices Have Increased Year-over-Year
Japan Consumer Price Index
January 31, 2006–March 31, 2025
Source: FactSet.
Meanwhile, better economic activity outside the United States and still strong US growth can bolster earnings at domestically focused European and Japanese companies and multinationals alike. According to FactSet estimates, MSCI EAFE earnings per share are forecast to grow over 9% in each of the next three years, with MSCI USA Index earnings growing in the low double digits. (See Exhibit 7.)
Exhibit 7: International Earnings per Share Growth Appears Set to Recover
Earnings Per Share Annual Percent Change, MSCI Indexes (E-estimated)
Sources: FactSet, MSCI, FactSet estimates. MSCI makes no warranties and shall have no liability with respect to any MSCI data reproduced herein. No further redistribution or use is permitted. This report is not prepared or endorsed by MSCI. There is no assurance that any estimate, forecast or projection will be realized.
Corporations act: The business case
Beyond the improving earnings outlook, both Europe and Japan have begun to focus more on improving shareholder returns, either through ongoing dividends or increasing share buybacks. Stock buybacks which have been strong in the United States are now an increasing part of how both European and Japanese companies return cash to shareholders. (See Exhibit 8.) In Europe and Japan, these increased share buybacks come alongside an already healthy dividend yield. (See Exhibit 9.)
Exhibit 8: Net Buybacks as a Percent of Market Capitalization
2013 to 2024
Sources: FactSet, S&P and MSCI. MSCI makes no warranties and shall have no liability with respect to any MSCI data reproduced herein. No further redistribution or use is permitted. This report is not prepared or endorsed by MSCI. There is no assurance that any estimate, forecast or projection will be realized. 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.
Exhibit 9: MSCI Dividend Yields Suggest Shareholder-Friendly Behavior
As of March 31, 2025
Source: MSCI. MSCI makes no warranties and shall have no liability with respect to any MSCI data reproduced herein. No further redistribution or use is permitted. This report is not prepared or endorsed by MSCI. 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.
We also see increasing scope for Japanese companies to further improve shareholder returns. The Tokyo Stock Exchange, in addition to pushing for companies to improve their price/book ratios, wants companies to reduce their cross-shareholdings in other firms. These cross-shareholdings are widely seen as a barrier to both market efficiency and transparency and have kept Japanese companies from pursuing mergers or allowing foreign companies to buy them.
Japanese companies with clear plans to improve returns and reduce their cost of capital—and that are willing to buy back stock trading below book value following the unwinding of cross-shareholdings—look particularly appealing to us for greater analysis.
International equities call
With more shareholder-friendly companies in potentially more quickly growing economies, we see reason for optimism that non-US companies can begin to close the valuation gap with their US counterparts after years of neglect. Although the overall environment is improving, we believe investors should remain focused on valuations and the catalyst companies may have to help close this gap over time. Travel abroad for value.
WHAT ARE THE RISKS?
All investments involve risks, including possible loss of principal.
The investment style may become out of favor, which may have a negative impact on performance.
Equity securities are subject to price fluctuation and possible loss of principal. Small- and mid-cap stocks involve greater risks and volatility than large-cap stocks. There can be no assurance that multi-factor stock selection process will enhance performance. Exposure to such investment factors may detract from performance in some market environments, perhaps for extended periods.
Active management does not ensure gains or protect against market declines.
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. Investments in companies in a specific country or region may experience greater volatility than those that are more broadly diversified geographically.
Small- and mid-cap stocks involve greater risks and volatility than large-cap stocks.
Investments in companies engaged in mergers, reorganizations or liquidations also involve special risks as pending deals may not be completed on time or on favorable terms. Low-rated, high-yield bonds are subject to greater price volatility, illiquidity and possibility of default.
Dividends may fluctuate and are not guaranteed, and a company may reduce or eliminate its dividend at any time.