Improvement signals in international equity markets
by Clas Olsson, CIO, Invesco International and Global Growth, Invesco Ltd. Invesco Canada
The Invesco International and Global Growth team has been managing international equities for 25 years. In that time, we’ve seen the performance pendulum swing widely across global regions and investment styles. But no matter the market conditions, our focus on EQV – Earnings, Quality and Valuation – has remained constant.
Most international markets had strong performance in the first quarter, driven by an improving macroeconomic backdrop overseas and a weakening U.S. dollar. Importantly, as we look at the markets through our EQV perspective, we have seen some encouraging changes:
- Earnings. For the first time since 2011, we have seen a synchronized global recovery in consensus earnings revisions, with all regions showing positive revisions. This started in 2016 in Europe and emerging markets as they benefited from a weakening currency and stronger commodity prices. The trend has spread to all major regions supported by improving economic indicators.
- Quality. When looking at return on equity figures outside of the U.S., they are depressed to a level that, over the past 35 years, has only been lower in the recessions of 1993, 2002 and 2009. That also means there is some potential for returns and profits to rebound going forward, in our view.
- Valuation. On a relative basis, international market valuations are close to historical lows when compared to the U.S. As of January 2017, the U.S. was trading at 35% premium versus international markets in terms of its price-to-earnings ratio for the next 12 months (versus a 16-year average of 20%), and at an 80% premium in terms of price-to-book ratio (versus a 16-year average of 42%).1
Given these bottom-up trends – as well as top-down considerations such as accommodative central banks in Europe and Japan, and exports being driven by weaker currencies versus the U.S. dollar – we believe there is a strong case to be made for international investing in today’s environment.
Looking toward the next 25 years
Given our silver anniversary this year, we’ve been asked two main questions:
- What’s the most critical contributor to your past performance?
- What is needed to continue your process for the next 25 years?
The answer to the first question is a sound investment philosophy focused on stock picking, active management and a long-term investment horizon. We believe that relying on macro calls is a much less consistent and more difficult way of seeking outperformance against the market – that’s why we focus on company fundamentals above all else.