Bullish on international stocks

Stocks A to Z
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Am I the only one who is bullish on international stocks? When it comes to international stocks, NOBODY is talking about buying the dip!

Some price/book ratios from Morningstar:

  • DFJ (WisdomTree Japan SmallCap Dividend Fund): 67%
  • FNDC (Schwab Fundamental International Small Company Index ETF): 99%
  • GWX (SPDR S&P International Small Cap ETF): 104%
  • DGS (WisdomTree Emerging Markets SmallCap Dividend Fund): 105%
  • IQIN (IQ 500 International ETF): 109% (compared to 380% for VOO)
  • MOTI (VanEck Morningstar International Moat ETF): 112% (compared to 364% for MOAT)
  • DGRE (WisdomTree Emerging Markets SmallCap Dividend Fund): 186% (compared to 495% for DGRW)

Keep in mind that the Big Mac Index shows most currencies to be undervalued against the US dollar.

When you combine the undervalued stocks with the undervalued currencies, international stocks are now as undervalued as US stocks were in the 1930s and 1940s.

If you were too afraid to buy international stocks 2 years ago, you now have another chance to load up at bargain basement prices.

I was born during the bear market of 1973-1974, so I was too young to take advantage of the bargains of late 1974 and the middle of 1982. Today’s screamingly cheap international stocks feel like a gift from the ghost of John Templeton. The abundance of well-diversified low-cost international stock ETFs provide an unprecedented opportunity for the small investor to participate in future bull markets.

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It will be interesting to see how the democracy trends, the worldwide gradual movement towards electing authoritarian/stronman who don’t follow historic norms, handles international investing. Otherwise I’d be more worldwide diversified.

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What were forward returns like in the past starting from similar CAPE levels, in those broad markets?
Note, I’m not saying they were bad…but that’s a good question to ask.
“Apparently cheaper than better quality goods” isn’t, by itself, a reason to expect good returns.
Ladas are always cheaper than Porsches.

As a side note, ignore P/B as a yardstick of valuation.
The best returns are available among the few firms with the highest, not lowest, P/B ratios.
They have the best economic characteristics, needing fewer assets to generate a given level of owner earnings.

Jim

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The best returns are available among the few firms with the highest, not lowest, P/B ratios.
They have the best economic characteristics, needing fewer assets to generate a given level of owner earnings.

I remember you sharing backtests in the past indicating this, which was somewhat non-intuitive on the surface but made sense upon deeper thought.

But reflecting on this further - if the goal is to identify firms with high earnings potential against low assets, it seems strange that high P/B would be best since P/B doesn’t have an earnings component. So by sorting on P/B, it seems like we’re using high price relative to book as an indicator that the market thinks there’s strong future earnings potential. But that seems like a rather indirect (perhaps muddy) way of getting at the measure ultimately being sought.

Would it be more direct to measure trailing earnings (or better? forward earnings estimates) as a % of book value (which I think is essentially ROE?) I wonder if a sort on ROE / market cap to hone in on companies with strong earnings relative to assets (high ROE %) but undervalued (lower market cap relative to that) might be interesting. Or alternatively, perhaps sorting by High P/B but requiring a certain ROE hurdle would weed out those firms that are priced high relative to book value but have dismal forward earnings estimates.

Any thoughts on the above? Do you recall if you’ve tested these sorts in the past and if any seemed more promising than high P/B?