Financials are prominent in international value stock benchmarks, Clearbridge Investments has found, even though the sector can be overpriced in Australia.
Writing in a note this week, ClearBridge Investments highlighted the revival underway in international value equities which it said looks set to continue in 2026.
According to the firm, rising premiums and broad-based stock gains in 2025 indicate a structural shift in market leadership, bringing the strategy back to life after a decade of neglect.
On ClearBridge’s international value strategy, portfolio manager, Grace Su said the current market demands a different approach to finding companies trading at significant discounts to their intrinsic value.
“In today’s market, we are finding opportunities not through broad macro positioning, but by leaning into specific sectors and businesses where balance sheets are stronger, earnings power is normalising and valuation still offers a margin of safety,” she said.
With financials now constituting nearly 40 per cent of international value benchmarks, Su said the sector remains “central” to the firm’s opportunity set.
“While valuations are no longer at extreme lows, in our view, they remain attractive given a combination of outsize earnings growth and double-digit shareholder yields.
“We believe exposure to financials is regionally diversified but supported by broadly consistent trends,” she said.
Her comments come as Australia’s largest financial stocks have for some time faced criticism for frothy valuations, with many big banks trading at a premium.
The worst of the bunch – and the only of the big four banks not to report double-digit gains last year – is traditional market darling Commonwealth Bank.
As previously reported by InvestorDaily, CBA’s strong long-term performance lifted its share price by 85.2 per cent over five years, but came unstuck last year amid concerns over profit margins and home loan competition.
Widely held by Australian equity fund managers and industry super funds, the latter has drawn criticism for contributing to distorted equity markets and inflating CBA’s share price.
While the major bank’s shares have now fallen 20 per cent from their peak of $192 in June last year, TradingView’s recent analyst poll showed the stock is still 19 per cent above its 12-month $124.90 price target.
Such premium valuations stand in sharp contrast to the dominance of bank holdings among international value stock benchmarks, which Su said benefit from improving loan growth, strong fee income, disciplined cost management and a benign credit environment.
One such example is Germany’s Deutsche Bank, which despite being up 500 per cent since July 2022, still holds a P/E ratio of 9.31, while its industry has an average P/E of 11.28.
She also said insurance holdings could perform well as value stocks as pricing normalises, supported by mid-single-digit dividend yields and attractive earnings growth prospects across Europe and Asia.
International value resurgence
Su said while last year’s gains were driven by short-term sentiment, the shift towards international value stocks has been building since the Global Financial Crisis (GFC).
“In our view, this reflects more than a short-term rotation; it points to a market environment that is increasingly supportive of valuation discipline at a time of elevated dispersion across regions, sectors and individual companies,” Su said.
She explained that the many structural headwinds that plagued international markets after the GFC, such as weak balance sheets, unresolved banking issues and constrained fiscal policy, have since eased.
As a result, banking systems have become healthier, corporate balance sheets stronger, and policymakers more willing to deploy fiscal support.
Su emphasised that international markets remain deeply discounted versus the US, with price-to-book gaps above 50 per cent. Meanwhile, value stocks in those markets trade at unusually large discounts to growth options and offer additional diversification benefits to portfolios dominated by US growth stocks.
Looking ahead, she pointed to a more stable global backdrop, fiscal programs, a broadening of investment beyond AI and tailwinds from global M&A as further support for international value investing.
Su concluded that while the firm understands bank investments are sensitive to economic cycles, the current environment of meaningful fiscal stimulus and accommodative monetary policy “helps mitigate downside risks.”
