by Christian Correa, CFA, Chief Investment Officer, Franklin Mutual Series, Franklin Templeton Investments
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 (right click on chart to enlarge)
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 (right click on chart to enlarge)
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 (right click on chart to enlarge)
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.
*****
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.
IMPORTANT LEGAL INFORMATION
This material is intended to be of general interest only and should not be construed as individual investment advice or a recommendation or solicitation to buy, sell or hold any security or to adopt any investment strategy. It does not constitute legal or tax advice. This material may not be reproduced, distributed or published without prior written permission from Franklin Templeton.
The views expressed are those of the investment manager and the comments, opinions and analyses are rendered as at publication date and may change without notice. The underlying assumptions and these views are subject to change based on market and other conditions and may differ from other portfolio managers or of the firm as a whole. The information provided in this material is not intended as a complete analysis of every material fact regarding any country, region or market. There is no assurance that any prediction, projection or forecast on the economy, stock market, bond market or the economic trends of the markets will be realized. The value of investments and the income from them can go down as well as up and you may not get back the full amount that you invested. Past performance is not necessarily indicative nor a guarantee of future performance. All investments involve risks, including possible loss of principal.
Any research and analysis contained in this material has been procured by Franklin Templeton for its own purposes and may be acted upon in that connection and, as such, is provided to you incidentally. Data from third party sources may have been used in the preparation of this material and Franklin Templeton (“FT”) has not independently verified, validated or audited such data. Although information has been obtained from sources that Franklin Templeton believes to be reliable, no guarantee can be given as to its accuracy and such information may be incomplete or condensed and may be subject to change at any time without notice. The mention of any individual securities should neither constitute nor be construed as a recommendation to purchase, hold or sell any securities, and the information provided regarding such individual securities (if any) is not a sufficient basis upon which to make an investment decision. FT accepts no liability whatsoever for any loss arising from use of this information and reliance upon the comments, opinions and analyses in the material is at the sole discretion of the user.
Products, services and information may not be available in all jurisdictions and are offered outside the U.S. by other FT affiliates and/or their distributors as local laws and regulation permits. Please consult your own financial professional or Franklin Templeton institutional contact for further information on availability of products and services in your jurisdiction.
CFA® and Chartered Financial Analyst® are trademarks owned by CFA Institute.
________________________________
1. Source: “Charge-off and Delinquency Rates on Loans and Leases at Commercial Banks.” Federal Reserve. First quarter 2024.
2. Source: “World Economic Outlook.” International Monetary Fund. April 2024. There is no assurance that any estimate, forecast or projection will be realized.
3. Source: US Consumer Price Index. Bureau of Labor Statistics. May 2024.
4. Source: US Monthly New Residential Construction. US Census Bureau. April 2024.
5. “Existing Home Sales Retreated 1.9% in April.” National Association of Realtors. April 2024.
6. Source: US Monthly New Residential Sales. US Census Bureau. April 2024.
7. The “Magnificent Seven” stocks refer to Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla.
Copyright © Franklin Templeton Investments
