Seeking true value in equities? Go global

Value has been out of favour for a long time for global equity investors, but we believe value will have its day once again as the value premium performs over time. Buying businesses for less than they are worth can be achieved in various ways and is not based on any one particular valuation metric.

At Brandywine Global we are truly global investors with access to broad equity sets, enabling us to achieve significant diversification, while targeting catalysts, both macro and industry specific. We believe an effectively executed global strategy should always have multiple avenues to generate alpha.

As we approach the end of the year, various geopolitical uncertainties and risks are emerging, including significant policy outcomes stemming from the US election. This leaves the potential to generate excessive volatility in financial markets. The Brandywine Global Opportunistic Equity strategy’s broad mandate gives us the flexibility to potentially sidestep certain obstacles while capitalising on opportunities created by diverging global monetary policy and economic cycles.

In our relentless pursuit of investment opportunities across the global canvas, several compelling themes are capturing our attention.

1. Equity valuations: Not all markets look expensive

The premium valuation of US stocks compared to other markets worldwide is strikingly apparent. We ask, what value investor would put 65% or more of a portfolio into the most expensive developed market in the world with the risks in the US today?

If a US-centric investor looked at European or UK companies, whether in the energy industry or in the banking sector, for example, they would see the discount in these markets relative to the US. But while a good number of European companies are priced at a steep discount relative to their US counterparts, many of these companies have the same global sales as their US competitors.

A US-centric investor typically wouldn’t consider Brazil, for example, a country with two-thirds of the population of the US. However, one can find high-quality companies in Brazil that we expect will benefit from what we see as a significant decline in interest rates.

A US-centric investor also does not have the currency opportunities a global investor can exploit. The Japanese yen has started to move up from a level we considered extreme. US interest rate cuts very much favour appreciation of the yen. An investor with global options can position for that by owning domestic Japanese companies.

2. Macro tailwinds as inflation normalises

A global monetary easing cycle has begun, led by emerging markets. Latin America has already started cutting interest rates, while Canada, Europe and most recently the US have followed suit. We expect others to follow shortly. These regions offer catalyst-rich environments poised to benefit from a reversal in central bank policy. Latin American commercial real estate and UK housing are two sectors that appear highly attractive to us as clear beneficiaries of falling interest rates.

3. Equity market concentration has reached extreme levels

The US tech and internet sector continues to dominate the global benchmark, though some of the largest players are experiencing setbacks this year. Nonetheless, concentration in the US stock market has reached extremely high levels. We have owned some of these names before when valuations were favourable, but currently our macroeconomic research, coupled with a value-oriented mindset, suggests that there are far more compelling opportunities worldwide than simply investing in what everyone else already owns.

4. Case study: Jet-setting around the world

Occasionally, we identify industry catalysts with global implications. Our current favourite example is the global shortage of commercial aircraft resulting from Boeing's five years of production issues. Owners of this increasingly scarce asset, whether they are airlines in any region of the world or the largest aircraft lessors, trade at single-digit price-to-earnings (P/E) ratios. Basic supply and demand economics suggests that pricing is likely to be quite favourable moving forward.

Conclusion

We believe now is a great time to capitalise on these opportunities. The Brandywine Global Opportunistic Equity strategy has the flexibility to look across the globe and is designed to outpace the broad market, while maintaining consistent exposure to value opportunities. We believe portfolios can benefit from an investment process that seeks “multiple ways to win” through macro, market assessment and stock selection, which has generated highly differentiated outcomes relative to peers.