How To Find Value In Int’l Equity ETFs

November 21, 2014

Is there any place a fellow can get a bargain around here?

This article is part of a regular series of thought leadership pieces from some of the more influential ETF strategists in the money management industry. Today’s article is by John Eckstein, chief investment officer and director of research at Astor Investment Management.

With the S&P 500 Index posting three-year annualized returns of 19 percent, investors are wondering about the valuation of the U.S. stock market relative to its counterparts overseas. In this piece, I’ll share a few of the tools we use to consider overseas investments and compare how the U.S. stacks up.

International stocks are just as risky as domestic stocks, with the added complication of being denominated in a foreign currency. So, there are no surefire bets here, though some indicators with a proven history suggest some markets may outperform the U.S. in the coming months.

Readers may be surprised, but one of our findings was that France may be prospective right now, using a fund like the iShares MSCI France ETF (EWQ | A-97).

But first, I’ll lay out the analysis that pointed to France and a few other international markets that are looking relatively attractive.

Momentum & Valuation

The first chart breaks down the world into the familiar categories of value and momentum.

The X axis represents “Valuation” and weights both the price-to-book ratio and the dividend yield of the underlying MSCI All-Country Indexes to rank countries. The relatively overvalued are near the origin (zero), and the further they are from the origin the more they are relatively undervalued.

To be clear, I’m only looking at how each country compares with the others today, and I’m not examining each country over its history.


The Y axis of the above chart rates countries from bullish up top (prices have been going up recently), to bearish momentum at the bottom (prices have been going down).

Note that I’ve made a judgment here about momentum. As my bond-trader father told me at a tender age: “In general, the trend is your friend.” That said, some of us believe in mean reversion. And if you do, feel free to make your own adjustments based on the data I provide.

Our value indicators pick out a few countries for consideration, but you aren’t going to like it: the eurozone laggards of Italy, Spain and France. Based on international comparisons, the U.S. and Switzerland look relatively expensive. Sadly, no country looks both relatively undervalued with encouraging price action.

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