FA Magazine May 2023 | Page 25

Evan Simonoff

Foreign Growth Stocks — A Diamond In The Rough ?

The conventional wisdom that quality growth stocks are difficult to find outside the U . S . is a misconception .


Mainstream thinking holds that value stocks have been set up as winners over the next five to 10 years while non-U . S . markets will enjoy valuation advantages in the same period , as both have underperformed for 15 years until 2022 .
That ’ s the expectation , anyway . Yet so far in this decade , many economic predictions are failing to materialize . Last year , there was supposed to be a recession in Europe . Now in 2023 , the recession is expected to arrive on domestic shores . It may but it hasn ’ t yet .
What is likely is that global growth should be driven by the usual suspects . Both China and India are expected to enjoy GDP growth of just over 5 % in 2023 , according to David Rolley , vice president and co-head of the global fixed-income team at Loomis Sayles , speaking at a press luncheon in mid-April .
Those two nations should account for more than 50 % of all global growth this year . That sounds impressive , but much of it will be powered by China ’ s reopening , not productivity .
Deglobalization has been rearranging international supply chains . Market structures are rapidly shifting away from the era when cheap Russian gas fueled Europe ’ s growth engine , something that was happening even before the Cold War ended , according to Hassan Malik , a global macro strategist at Loomis Sayles who also spoke at the luncheon . Malik said it ’ s not clear if the current dynamics are sustainable , as emerging markets appear to
Nations with younger populations than the United States , Europe and Japan don ’ t have to grapple with the same acute labor shortages afflicting developed markets . be struggling with supply chain issues . Many developing nations were harder hit by the pandemic than mature markets , but their recovery could be a surprise factor in the next few years . And a number of former Soviet satellite states in Central Asia could enjoy more economic power as they emerge from under Russia ’ s thumb in the decade ahead .
Still , emerging markets now look particularly cheap , with many posting earnings growth in the mid-teens and their stocks selling for around 10 times earnings , Malik said . On top of that , nations with younger populations than the United States , Europe and Japan don ’ t have to grapple with the same acute labor shortages afflicting developed markets .
There ’ s little doubt that emerging markets boast compelling investment fundamentals . These attributes are likely to become even more obvious as developed countries face secular challenges of debt and demographics in the next decade . Some of the world ’ s smartest value investors , including GMO ’ s co-founder Jeremy Grantham and Rob Arnott of Research Affiliates , have been banging the drum for developing markets for the last decade .
A Heyday For Value ?
Giant investment complexes like Vanguard Group , meanwhile , say value stocks will outperform in the next five years , after growth stocks saw their out-