Tweedy Browne: Green Shoots Appearing For Value Investing

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In their latest Q3 2020 Market Commentary value investing firm provides some great insights on where they believe the ‘green shoots’ are starting to appear for value investors. Here’s an excerpt from the letter:

It has been an extraordinarily difficult stretch of time for value investors, with zero interest rates continuing to favor longer duration growth stocks, particularly the dominant large cap technology stocks in the United States.

This is evident in the disparity of performance between value and growth indexes, which has rarely if ever been wider than it is today. However, green shoots for value investing may have begun to appear, as the value component of the MSCI World Index modestly outperformed its growth counterpart in the difficult month of September.

Value stocks’ outperformance in September was more pronounced in the U.S., where the S&P 500 Value Index declined about half as much as the S&P 500 Growth Index, as technology stocks took a beating. On the other hand, the MSCI EAFE Value Index, an international value index that is less impacted by technology companies, outperformed its growth counterpart in June and August, but not in September.

The best performing segment of the global and U.S. equity market in September was the “materials” sector, made up primarily of what some market observers refer to as old economy companies in the business of the discovery and procurement of raw materials, i.e., mining, metals, packaging, chemicals, and forestry products companies. Materials stocks tend to be economically sensitive, and generally do well during periods of economic recovery and strength.

As mentioned earlier in this commentary, we believe the ongoing volatility in global equity markets over the last several months has spawned a significantly improved opportunity set for value investors, particularly for securities domiciled outside the U.S. We are hopeful that this valuation disparity foreshadows an improved return stream for investors like us who have maintained greater exposure to non-U.S. equities.

Looking forward, we believe the stage may be in the process of being set for a rotation away from the high performing U.S. equity market to Europe, Asia and even some of the emerging markets. Over time, there has clearly been a cyclical aspect to U.S. versus non-U.S. equity returns, as evidenced by the significant outperformance of non-U.S. equities between 2000 and 2009, and the unprecedented strength of the U.S. equity market since the financial crisis in 2009 through today.

In fact, a look at rolling ten-year returns for the S&P 500 and the MSCI EAFE Index going back as far as the mid-1970s reveals that it’s been virtually a “toss up” as to which index outperforms, and according to the folks at Morgan Stanley, we are currently well into the strongest period of outperformance for U.S. vs. International stocks in equity market history.

In our view, any of the factors mentioned above could serve as a spark that ignites a shift in investor sentiment towards non-U.S. equities and, potentially, better relative returns for international and global funds. Now may not be the time to let home country bias drive investment decision-making. Rather, it may indeed be the time to skate to where we believe the puck may be going.

You can read the entire letter here:

Tweedy Browne – Q3 2020 Letter

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