Any balanced portfolio will include both value and growth stocks. And, since growth stocks have been outperforming value stocks for several years, conventional thinking is that the time is right to tilt towards value stocks.

In fact, this is the sixth time since 1945 that growth has outperformed value. In each of the previous five cases, value stocks eventually came roaring back after a period of 5 to 8 years. Currently, growth stocks have beaten value for 6 years and counting, so the end is likely near, analysts would say.

The next logical question becomes which value stocks to buy – American or international?

American value stocks

Traditionally, large cap American stocks have been fairly reliable investments. Investors from the corners of the earth have been buying American for over a hundred years and continue to do so today. But, how wise is this decision in the last quarter of 2016? Have the times changed?

One of the main reasons that people have invested in US stocks was the unspoken, expected stability of the political atmosphere. Even when the economy experienced its hardest times, the collective mindset was that the US was somehow immune to long-term, catastrophic trouble and would recover hastily. Today, that confidence seems to be teetering, and rightly so.

The US economy has not been growing, as seen by the recent anemic GDP numbers. Indicators, both lagging and leading, paint a dismal picture. Job numbers are bad. Construction permits and housing numbers are stagnant. Add to that the political uncertainty in Washington and you have a recipe for concern. Consumer confidence is low.

Furthermore, US companies continue to move manufacturing overseas. The military and space programs have been shrunk. The government is bloated and the national debt is close to twenty trillion dollars. And there is reason to believe that the Federal Reserve could increase rates by the first of the year. All of this should, at a minimum, fuel investor caution.

Perhaps even more concerning is the US CAPE, which is currently around 27, the same as it was in 2007 before the financial collapse. The only times when it was higher was in 1929 and during the 2000 bubble.

Even the Federal Reserve itself issued a warning over US stock prices. In their semi-annual monetary report that came out in July, they noted that valuations were much higher than their thirty-year averages.

International value stocks

While American value stocks remain highly priced, there are plenty of affordable options in the international market space.

International markets have been lagging behind the US for several years, creating the opportunity for a strong market climb sometime in the near future. And, history would suggest that the international equities always come back with strength.

One mistake many investors make is to lump all international opportunities into one basket, when in fact there are two distinctions that must be made: emerging and non-emerging markets.

Emerging markets are in developing nations and are considered to be quite risky. But, non-emerging markets speak of those within first world nations – like England, Germany, Switzerland, France, Korea and Japan. These markets are home to companies that are highly rated and credit worthy – companies like Siemens, Samsung and Toyota, for example.

Ideal value markets, such as those listed above, offer a number of quality opportunities. Quality opportunities are ones that are rated B or higher by Standard & Poor’s, and have strong cash flow, pay dividends, have an “economic moat,” good management and a decent P/E ratio.

The markets to aim for are not those that are emerging, but rather those that are stagnant or depressed. Such markets are those that are seeing lower trading volume, have a lack of buyers and hence, are priced at a discount. These are ideal candidates for value investing. When valuations are lower, the future returns tend to be better.

International value investors are looking for bargains. By bargains, we don’t mean cheap, or low book value. We mean the net net value, as Ben Graham called them. Stocks with high PE yields and low PE ratios, ideally under 10. And, after investing, they need a dose of patience while they wait for other investors to discover the same bargains. Investing in companies that pay a dividend allows you to ride-out the process.

Decreasing portfolio volatility

Volatility is what investors are facing today. Political and economic climates are less stable than at any time since World War II. And, for the first time in decades, there are plenty of questions about the long-term health of the American economy and American companies.

The same can actually be said about all markets these days – and so investing in several international markets, rather than just one or two, protects you from the ups and downs of any one country.

After the global financial collapse of 2008 and 2009, the wise play was in growth stocks. Now, eight years later, the focus needs to sway back towards value investing, although not entirely. A simple tilt is all that is required.

Currency concerns

Another international play to consider is currencies. Closely tied to market volatility, investors should hedge with a basket of currencies.

The two most stable national currencies of the last twenty years are anything but stable today.
The US dollar, while recently strengthening, is still very much in flux as political uncertainty lingers. Investors are wise to invest outside of the US. The British pound, long a currency bulwark, has fallen sharply this year following their exit from the EU. A year ago, nobody saw this coming. A perfect example of why you must diversify.

With currencies, in the long haul there really is no difference between a hedged or unhedged portfolio.

Conclusion

There are plenty of reasons why investors need to diversify. The only thing that is certain in the globe right now is uncertainty. Analysts and experts are not sure how the coming months and years are going to unfold. Hedging through diversification is a must.

History tells us that the recent years of steady performance in growth stocks will likely be ending sooner, rather than later. International value stocks are still trading at a discount, as opposed to American opportunities which are still expensively priced.

With so many factors impacting the American market, adding quality international value stocks to your portfolio is both sensible and strategic.

And, with most value stocks, enjoy a dividend along the journey.