Non-US markets have underperformed the US for quite some time. This has been exacerbated lately by their diverging style factors.
As seen in the chart above, investors largely favored value stocks as the global economy began to reemerge from the COVID-19 pandemic following emergency-use authorization of the first vaccine in late 2020. This headwind for growth stocks has been most significant, and enduring, in international markets. For example, the MSCI All Country World ex US Growth Index lagged its value counterpart by nearly 30 percentage points in the three years through October 2023. But while the value rally has continued outside the US, 2023 saw investors reembrace US growth stocks despite their relatively high valuations.
For international quality growth investors, the hope, of course, was that resurgent performance for US growth stocks would herald a similar trend elsewhere. Although this has yet to be the case, the variability in the performance of growth stocks in recent months may suggest a reversal in style trends is approaching. For example, the return spread between international value stocks and international growth stocks does appear to be flattening.
There is also reason to question the underpinnings of a rally characterized by companies with weak profits. In many cases, the catalysts for the rise in their shares have been speculative or one-off developments, such as the announcement of share buybacks, a short-lived valuation opportunity, or takeover chatter. A clear example is the broad rotation toward stocks of low-quality, cyclical companies in Japan on anticipation that a flurry of reforms may, eventually, improve corporate governance and shareholder returns in the country.
The idea that highly profitable, growing companies outside the US will continue to perform the way they have over the last three and a half years isn’t supported by their earnings outlook. Therefore, a rotation back into growth may not be far off in the future. ∎