5 Best Int'l Value Picks Right Now

August 21, 2017

ETF.com: Is the China value play over, then?

Faber: No. If you look at the spectrum of 45 countries we look at, there's a lot in the bucket of reasonable-priced to cheap. But our global value ETF [Cambria Global Value ETF (GVAL)] is only choosing the cheapest 25%.

So some of the countries will grow out of it if they have good enough performance, like China did. But we still think China is a far better choice than the U.S., which is at a valuation long-term P/E ratio of above 30 now.

ETF.com: What pockets of value or opportunities are investors overlooking right now?

Faber: We've been singing the same tune for a long time. In general, investors here have way too much U.S. equity exposure.

The starting point for most people is 50% U.S., 50% foreign in a global market allocation. But almost every U.S. investor has about 70% in U.S. And it happens everywhere.  Italians put the most in the Italian market, etc.

But it's a horrible idea, particularly now when the U.S. is one of the most expensive countries in the world, at a P/E of around 30, versus the rest of the world being much cheaper.

Our first recommendation is, at a minimum, diversify to where you have at least half your equity exposure in foreign. And then if you want to be more value-centric, tilt it even more toward value.

ETF.com: What's the best value in the world today from a country perspective?

Faber: The cheapest five—and some of these get small, so it's a little easier to say that it's cheap because there's only 10 stocks in the whole index versus 2,000 in Japan, for example—but they are the Czech Republic, Russia, Portugal, Brazil and Italy.

This cheap bucket has a CAPE ratio of around 10, a valuation that's one-third the valuation of the U.S. That compares to the median across all 45 countries of around 17. Foreign developed is around 20; foreign emerging around 15; and the U.S. is at 30.

ETF.com: If you go this extreme value route and concentrate on the five cheapest markets, is there a time horizon you need to work with to let this value play materialize?

Faber: It's the same as the business cycle. With value, we always say five, 10 years. Have a long-term perspective.

That said, I would much rather have my money in a basket of cheap equities than expensive ones. The expensive ones historically have shown they have a much higher probability of a big, fat drawdown in their future. That just happens to be the U.S. right now, but historically it's been other countries. And for the devalued stocks, you can’t rebalance frequently, because it doesn't give it time to recover.


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