Over the past year, ex-US developed markets equities are lagging their U.S. counterparts. As highlighted by a 12-month decline of 10.64% for the MSCI EAFE Value Index (as of Nov. 9, 2018), value stocks have not been immune to that trend.Whether it is on a domestic or international basis, value has spent considerable time in recent years being unloved relative to growth and momentum. The out of favor status of developed markets stocks and the value factor could be poised to change.“Given the increasing bearish mood of global markets and the historically low current valuations of the value strategy after long periods of underperformance, conditions appear to be ripe for the long-awaited value resurgence,” said Andrew Lapthorne, the head of equity quantitative research at Societe Generale. 1 The laggard status of developed markets outside the U.S. is also notable. At the end of the third quarter, the MSCI USA Index was positive on year-to-date basis, but a dozen other MSCI benchmarks focusing on major developed economies, including Australia, Japan, Switzerland and the U.K., were in the red.
Areas Of Opportunity
Not all markets are currently offering value propositions. Fortunately for investor considering value wagers, some of the larger, least volatile developed markets outside the U.S. are showing some signs of value rebounds. Those include the U.K. and Japan, among others.In the U.K., “savaged value stocks are finally beginning to draw some attention from fund managers on account of their cheapness,” reports Investment Week. 2
“The shares have reached such low levels as investors have been selling them off to fund purchases of technology companies but that process may be starting to reverse.”As of the end of the third quarter, the MSCI U.K. Index, based on current and forward price-to-earnings ratios (P/E ratios) and price-to-book-value, was significantly discounted relative to the MSCI World and MSCI All-Country World benchmarks. The U.K. index also featured a noticeably higher dividend yield than those indexes and the S&P 500.
Source: MSCI, as of Sept. 28, 2018Japan, the world's third-largest economy behind the U.S. and China, is another major developed market showing value characteristics. At the end of the third quarter, the P/E ratio on the MSCI Japan Index was just 14.12x. 3
That benchmark yields just over 2%, but in recent years, Japan's traditionally cash-rich but tight-fisted companies have been parting with more of their cash to reward investors via buybacks and dividends.Related: More Signs of Value’s Vindication
Importantly, Japanese companies are not taking on new debt to fuel shareholder rewards. Rather, the country, is home to some of the world's sturdiest corporate balance sheets. Japan's payout ratio, the proportion of earnings paid out as dividends, is the developed world's lowest at just 30% and 50% of Japanese companies have more cash than debt on their balance sheets. 4
Adding to Japan's value proposition is this nugget: Last year, Japan's aggregate return on equity (ROE), or net income dividend by shareholders' equity, topped 10% for the first time on record.
Accessing International Value
The ALPS International Sector Dividend Dogs ETF ( IDOG
) is a fund that displays value traits. The U.K. and Japan combine for nearly 31% of IDOG's geographic exposure. For more information about the fund, click here
Source: Business Insider Nov. 10, 2018 https://www.businessinsider.com/stock-market-crash-investing-strategy-about-to-comeback-how-to-profit-2018-11 2
Source: Investment Week October 2018 https://www.investmentweek.co.uk/investment-week/news/1401038/uk-cheapest-value-stocks-world 3
Source: MSCI https://www.msci.com/documents/10199/b3ee6464-f705-4d65-81a0-d8756607cf9f 4
Source: Financial Times Oct. 18, 2018 https://www.ft.com/content/535a21cc-d13f-11e8-9a3c-5d5eac8f1ab4 Important Disclosures & Definitions An investor should consider the investment objectives, risks, charges and expenses carefully before investing. To obtain a prospectus which contain this and other information call 866.675.2639 or visit www.alpsfunds.com. Read the prospectus carefully before investing. Standardized performance for the ALPS International Sector Dividend Dogs ETF (IDOG) can be found here . Current holdings for IDOG can be found here . ALPS International Sector Dividend Dogs ETF Shares are not individually redeemable. Investors buy and sell shares of the ALPS International Sector Dividend Dogs ETF on a secondary market. Only market makers or “authorized participants” may trade directly with the Fund, typically in blocks of 50,000 shares.
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