Two Markets, Two Stories: How Value Stocks Have Outperformed Internationally

Value Stocks: U.S. Drag, International Boost?

Value stocks are living a double life—and if you’re looking only at the U.S., you might be missing the plot. While value strategies have struggled on U.S. turf, markets beyond American borders tell a very different story.

This graphic, in partnership with MSCI, shows how value stocks outside the U.S. have outperformed their benchmarks while underperforming domestically.

What is Value Investing?

Value investing involves buying stocks that appear undervalued. This means looking at metrics like price-to-book value, price-to-forward earnings, and enterprise value-to-cash flow from operations. 

Value is one element of factor investing that investors can look at when targeting characteristics that can help explain the bulk of stocks’ risk and return.

The Performance of Value Stocks

In recent years, the success of the value factor looks very different depending on where the stocks are located. The table below shows the difference in return between the value index and its benchmark.

Within the U.S., value stocks have lagged their benchmark over various timeframes. This was partly due to a long period of low interest rates and modest inflation which favors growth stocks. In particular, mega-growth stocks like the Magnificent Seven have dominated stock market performance in America. These stocks’ ultra-high valuations mean they are excluded by many value strategies.

However, in developed markets outside the U.S., value investing has seen stronger returns than its benchmark. Internationally, mega-cap stocks do not dominate the market, leaving more potential for value to outperform. 

Financials, a core component of value strategies, saw a stronger rebound in markets like Europe, where banks were coming off years of negative rates. Unlike in the U.S., even modest post-COVID rate hikes significantly lifted margins. And with lower starting valuations in regions like Europe and Japan, these value-oriented banks had more room to rise as profitability improved.

A World of Value

While value stocks have underperformed in the U.S. and growth stocks have dominated the narrative, this is not the case elsewhere. 

Historically, companies that appear undervalued have beaten their benchmarks in other developed markets. For the international allocations within portfolios, investors can consider incorporating value stocks.

Discover 50 years of lessons shaping the future in MSCI’s free report Factor Indexing Through the Decades.