Value stocks, having historically traded at attractive valuations, may be advantageous to investors heading into 2024, according to Christian Correa, president and chief investment officer for Franklin Mutual Series.
In Franklin Templeton’s latest global outlook, Mr Correa highlighted that starting valuations have been a strong indicator of long-term future returns, with the current valuation of the MSCI World Value Index showing this same promise.
Namely, at 31 October 2023, the MSCI World Value Index’s price-earnings (P/E) multiple was trading at a discount to its historical average, whereas the P/E multiple for the MSCI World Growth Index was at premium.
In comparing the trailing P/E multiples for global growth and value stocks with their return over the next 10 years, Franklin Templeton found that lower P/E stocks achieved higher future returns over the next decade.
“With 2023 global market returns concentrated in a handful of US stocks, seeking out value stocks can give investors more diversified global exposure and potentially more consistent returns over time, in our view,” Mr Correa said.
In Europe, Franklin Templeton projects that globally competitive companies will trade at compelling valuations and provide significant return potential.
Moreover, Mr Correa pointed to Japan’s “increasingly dynamic market worth investors’ attention”.
“More and more Japanese companies are focused on improving returns on capital, raising prices amid higher inflation and are willing to take more risks to pursue faster growth – a marked change from the past few decades.
“Government infrastructure spending and the long-term energy transition are also geared toward sectors that trade at value multiples, and may be compelling long-term opportunities,” Mr Correa added.
This is on the back of global monetary policy normalisation, also set to positively impact certain value-oriented sectors, he explained.
“For value investors, the recent drop in valuations in the consumer staples, utilities, and real estate sectors can create greater prospects of finding stocks unfairly trading below their fundamental value.”
This was echoed by Stephen Dover, chief market strategist and head of the Franklin Templeton Institute, who noted that while a small number of high-performing companies continue to lead broad US indexes, this is not the whole picture.
“The promise of artificial intelligence, among other digital transformations in the economy, continues to propel these high-performing stocks,” Mr Dover said in Franklin Templeton’s market outlook.
“However, we believe the best future investment opportunities are likely to come from outside this small group as the earnings power across the rest of the market is being undervalued.”
