The Cambria Global Value ETF (NYSE: GVAL) was recently launched in March of 2014 to bring value investing worldwide. The international ETF will screen for opportunities using criteria based on Benjamin Graham and David Dodd's work in value investing and securities analysis, selecting the most attractively valued markets across 45 developed and emerging market countries.
With an expense ratio of just 0.69%, the international ETF doesn't charge quite as much as many international funds, but the newness may warrant conservative investors to spend a bit of time on the sidelines to see how the strategy plays out.
RenAsset Management Chief Investment Officer Plamen Monovski recently told Investment Week Senate Conference delegates that the entire value of the U.S. technology sector is more than equal to the value of emerging markets. In particular, the entire Turkish market value right now is roughly equivalent to Starbucks, while Facebook's valuation could purchase all of Malaysia's public market.
These comparisons are not only surprising on a fundamental level, but highlight just how cheaply valued many emerging markets are relative to the U.S. Certain emerging markets could present a compelling opportunity given their dividend growth, increasing competitiveness, and ongoing improvement in currency volatilities and fiscal policies in some cases.
Shares of the iShares MSCI Emerging Markets Index ETF (EEM) is trading up more than 8.4% over the past month.
China's exports fell 6.6% year over year to $170.1 billion in March, while imports fell an even worse 11.3%. These figures took many economists by surprise and quenched hopes that the downturn was only temporary. Meanwhile, the country could have a tough time reaching his 7.5% GDP growth for 2014.
"We believe that China's trade growth in the first half would be distorted as the export over-invoicing activities last year have inflated the base for comparison," said Zhou Hao, Chinese economist at ANZ in Shanghai, in a Reuters story. "Our field study also shows that the exports are more resilient than what the headline data suggests."
Shares of the SPDR S&P China ETF (NYSE: GXC) fell 2.74% over the past three months compared to a 1.43% fall in the U.S. SPDR S&P 500 ETF (NYSE: SPY).
Relative valuations can provide investors with some insights into which countries may be overvalued and which may be undervalued. Using the U.S. S&P 500 as a benchmark, Japan's Nikkei 225 appears to be slightly overvalued after its recent move higher.
The Nikkei 225 trades with a price-earnings ratio of 30.16x relative to its median of 40.35 compared to the S&P 500's current 18.55x relative to its 14.53x median. While the U.S. trades above its historic multiples and Japan trades below its historic multiples, Japan's averages include two extraordinary periods.
International investors may want to consider these valuations when choosing opportunities within the two countries.
Middle income countries account for the majority of the world's population, and unfortunately, few of them transition to high income countries.
In 2011, the World Bank found that of 101 middle income countries in 1960, only 13 had become high income countries by 2008. Most economies in Latin America and the Middle East in particular failed to jump to a higher economic level.
Making the jump to a high income country can be difficult, but most economist seem to agree that it stems from healthy infrastructure and an open economy. International investors should keep a close eye on countries embracing these reforms as they could become attractive investment opportunities.
Most mainstream economists use purchasing power parity ("PPP") to compare relative currency valuations using what are known as international dollars. The theory is that exchange rates alone may not be entirely accurate since there are other potential factors at play like trade barriers.
Purchasing power parity compares the ratio of all prices, in say the U.S., to all prices in a different country, say Europe. The assertion is that the PPP-adjusted exchange rate is where prices should be based on the economy's fundamentals. Deviations from these levels are seen as overvalued or undervalued currencies.
The problem some economists see with PPP is that it doesn't apply to all goods - particularly those that can't be traded. After all, a steak in New York and a steak in Paris aren't exactly completely interchangeable since other factors like convenience or environment may play a larger role in price than the product itself.
As a result, investors should take the idea of PPP and international dollars with a grain of salt - only commodities like oil barrels or gold may fit the mold completely.
Most financial advisors recommend having somewhere between 15% and 25% of a portfolio dedicated to international stocks, with the number increasing over time as global investments become more stable and liquid. In fact, some experts now think that total international exposure should be closer to 50% with a focus on developed markets in Europe or Asia.
Unfortunately, many U.S. investors have very little exposure to international stocks - maybe even less than they think. Some investors purchase global funds in hopes of diversifying abroad, but in reality, these funds typically hold at least 50% of their portfolio in the U.S. Instead, investors should look towards international funds that hold exclusively international stocks.
If you're curious about the difference between global and international funds, check out an article called What's the Difference Between Global & International Funds? to make sure you're on the right side of the fence.
Emerging markets may have become the most popular international investment for many investors, but developed markets outside of the U.S. also offer compelling returns. During the 25 years ended December 31, 2012, the U.S. ranked ninth in performance after a number of developed countries around the world.
Top performing developed countries included Denmark, Sweden, Hong Kong, Switzerland, and Australia, while Canada, Norway, and the Netherlands also outperformed the United States. While these countries may not be the top performers in any given year, their long-term track record makes them attractive investments for those in the U.S. looking to diversify their portfolios.
The Russell 2000 has surged more than 250% since the March 2009 bear-market bottom, outpacing the Dow 30, S&P 500 and NASDAQ 100 by a wide margin, according to a recent report by the Wall Street Journal. These dynamics have many analysts asking just how long the small-cap market can rally without a retracement.
The WSJ quotes MKM Partners' Jonathan Krinsky as saying that "forward returns for the next few months seem neutral at best, with a fairly significant risk of a 5-10% pullback."
Investors looking for small-cap exposure may want to look outside of the U.S. for diversification. International small-cap funds haven't been performing as well as U.S. small-cap stocks and may offer a more attractive risk-reward profile at these levels, particularly for individual investors.
Funds are flowing into U.S. healthcare ETFs at the fastest rate in at least six years due to the booming biotechnology and pharmaceutical sectors. According to Bloomberg, more than half the money flowing into U.S. sector-based ETFs in January and February went into healthcare funds.
Global healthcare ETFs haven't seen as much capital inflow as domestic ETFs, but the dramatic rise in projected spending in developed countries around the world should drive them higher over the long-term.