From the desk of Steve Strazza @Sstrazza
For most of my career, I’ve listened to fundamental analysts make the argument that investors should be overweight international stocks because they’re “cheaper” than US stocks.
This has been the case for a long time now, and it’s merely a function of the fact that there are far more value and cyclical stocks overseas.
But, since value stocks have been out of favor for so long, ex-US stocks have severely underperformed domestic markets.
Growth has been the place to be for the last decade, and for this reason the alpha has been with the tech-heavy US stock market over its global peers.
But now that we’re seeing the tide shift in favor of value, we’re also seeing early signs of reversals in the US versus the world relative trends.
There’s still more work to be done before we have conviction that we want to favor international stocks, but the weight of the evidence continues to move in that direction.
In today’s post, we’ll discuss what we’re seeing from these relative trends and then go over some areas of the global equity market that are likely to benefit from the value over growth theme.
Let’s kick things off with a Mystery Chart from a few weeks ago. It was an inverted chart of Brazil $EWZ relative to the All Country World Ex-US Index.
Here it is, flipped right-side up:
We’re starting to see more and more evidence that Brazil could be turning the corner, as EWZ just found support relative to international stocks at the 2016 lows.
After a swift rally off this key support level, momentum just hit its highest level in several years.
While this is definitely a bullish development, what we really want to see from Brazil and other countries around the world is outperformance against the US.
Here’s a weekly chart of Brazil versus the S&P 500:
The relative ratio is finding support and reversing higher off the very same level that it bottomed at almost 20 years ago. We need to see some follow-through from this near-term relative strength as the structural trend is still lower for now.
But this is definitely a solid start.
Another reason why we have a close eye on Brazil right now is because of their heavy exposure to the value factor.
More than two-thirds of the index is allocated to materials, financials, and energy stocks, all of which we want to be overweight right now.
Considering the composition of the MSCI Brazil Index, seeing the country move into a leadership role in the future would make sense.
Here’s a table showing the growth and value exposure of all the individual country ETFs in our international universe:
Notice how the S&P 500 has the least amount of value relative to its growth exposure than any other country except for Taiwan. Therefore, if we’re in an environment where value stocks are outperforming, the US is likely to struggle relative to stocks around the world.
And we’re already seeing this start to happen.
Here’s the All-Country World Ex-US $VEU relative to the S&P 500:
Not only do we have the first higher high and higher low in a long time, but momentum was recently overbought for the first time since 2020.
And it’s the same story when we look at emerging markets on a relative basis. Here’s $EEM versus $SPY:
The ratio just pierced above a 12-month downtrend line, made a higher high, and printed its first overbought reading in more than three years.
The message we’re trying to get across here is simple: For the first time in several years, we’re seeing strong evidence of a reversal in these relative trends that would favor the international indexes.
As discussed earlier, these trend reversals would make a lot of sense considering the relative strength out of value stocks and the significant exposure that global equities have toward value.
But, as you can see in the table, it’s not as simple as just buying the countries with the most value exposure.
For example, Chile and Turkey are toward the top of the list. But we definitely don’t want to buy charts that look like these:
Brazil looks much better than those countries on an absolute basis, but we still want to see more improvement before we have any conviction being long over longer timeframes:
For now, we can trade this range from the low 30s to the upper 30s. But there are definitely better opportunities. Let’s look at some of them now.