Despite ongoing economic weaknesses, especially in Europe and parts of Asia, these regions offer attractive entry points with depressed valuations for investors seeking firms with strong free cash flows, according to Principal Asset Management’s CIO, George Maris.
“There’s a notion the US drove all the outperformance these past few years while international stocks languished. But that’s not entirely accurate,” he said, pointing to India and Japan as some of the strongest markets over the last several years that kept pace with the Nasdaq.
Maris noted that India's growth was driven by capital flowing out of China, while Japan required corporate reforms to reignite inflation and end decades of stagnation.
Moreover, he added that the international equity market presents “promising examples of companies” in mining, defence, and insurance, showcasing resilient free cash flow growth and attractive valuations, providing opportunities outside the US.
Ultimately, Maris emphasised the importance of focusing on economically sensitive sectors and markets, adding that by utilising concepts like implied alpha, investors can construct more resilient international equity portfolios.
“In today’s 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, bolstered pro-growth activities and benefited strong, competitively advantaged companies.”
The UK and China
But Maris said that there are two markets in particular which deserve investors’ attention, as their depressed valuations make them “intriguing”.
The first one is the UK equity market, which has been dealing with ongoing post-Brexit challenges, becoming one of the most undervalued markets globally.
Maris highlighted that many UK firms are multinationals generating a significant portion of their free cash flows from markets outside the UK, primarily the US, often exceeding their domestic revenues.
“However, their stock prices often do not fully reflect this global exposure, presenting potential arbitrage opportunities. UK companies that re-listed their shares in the US often experience notable increases in market value, driving significant shareholder appreciation,” he said.
The second undervalued market is Chinese stocks, which have drawn significant pessimism from investors due to structural issues like geopolitical tensions and concerns about the rule of law.
But, according to Maris, the investor pessimism is often extreme, given that Chinese valuations are deeply discounted versus their history and peers.
Moreover, he described the recent policy decisions from the Chinese government and the People’s Bank of China as pro-market.
“Although there is a heated debate among investors about whether these steps are sufficient to turn the economy and solve China’s structural issues, recognition is emerging that important key structural issues are being addressed in a meaningful way,” he said.
“Corporate governance in China has improved in the past few years, making the risk-reward setup for China intriguing.”
