Despite continued economic weaknesses, notably in Europe and parts of Asia, these regions offer attractive entry points with depressed valuations for investors looking for companies with strong free cash flow, according to George Maris, CIO of Principal Asset Management.
“It is the United States that is believed to have been behind the outperformance in recent years as international stocks languished. But that’s not entirely accurate,” he said, singling out India and Japan as among the strongest markets in recent years keeping pace with the Nasdaq.
Maris noted that India’s growth was driven by capital flows out of China, while Japan needed business reforms to revive inflation and end decades of stagnation.
Furthermore, he added that the international stock market presents “promising examples of companies” in the mining, defense and insurance sectors, illustrating resilient free cash flow growth and attractive valuations, offering opportunities outside the United States.
Ultimately, Maris emphasized the importance of focusing on economically sensitive sectors and markets, adding that by using concepts such as implied alpha, investors can build more resilient international stock portfolios.
“In the current environment, international equity investors should focus their efforts on economically sensitive sectors and markets,” Maris said.
“Recent substantial government measures, including monetary easing and stimulative fiscal policies, have supported pro-growth activities and benefited strong, competitively advantageous businesses. »
United Kingdom and China
But Maris said there are two markets in particular that deserve investors’ attention because their depressed valuations make them “intriguing.”
The first is the UK stock market, which has faced persistent post-Brexit challenges, becoming one of the most undervalued markets in the world.
Maris highlighted that many UK companies are multinationals generating a significant proportion of their free cash flow in markets outside the UK, mainly the US, often exceeding their domestic revenues.
“However, their share prices often do not fully reflect this global exposure, presenting potential arbitrage opportunities. UK companies that have re-listed their shares in the US often experience notable increases in their market value, leading to significant appreciation for their shareholders,” he said.
The second undervalued market is Chinese stocks, which have attracted significant pessimism from investors due to structural issues such as geopolitical tensions and concerns over the rule of law.
But, according to Maris, investor pessimism is often extreme, given that Chinese valuations are heavily discounted relative to their history and peers.
Furthermore, he described recent policy decisions by the Chinese government and the People’s Bank of China as market-friendly.
“While there is heated debate among investors over whether these measures are sufficient to turn around the economy and address China’s structural problems, there is growing recognition that important structural issues keys are addressed in a meaningful way,” he said.
“Corporate governance in China has improved in recent years, making the risk-reward setup for China intriguing. »
