Going Granolas: Looking For Value in Developed Markets in 2024

Too much North American exposure in your portfolio? Consider adding a healthy dose of global diversification to your portfolio with Europe’s GRANOLAS – find out why and how in our latest article below.

While Canada Day has come and gone, it seems that “true patriot love” isn’t just in Canadian hearts;
it’s firmly embedded in our investment portfolios too. Due to the phenomenon of home country bias, many Canadian investors’ portfolios tend to overindulge in familiar Canadian and U.S. companies.

By concentrating on North America, Canadians might be missing out on compelling investment opportunities, far and wide. One option for value beyond our borders is international developed markets. As at May 31, 2024, $6.5 billion in Canadian ETF flows have gone into international markets year-to-date, which is up over 8% in 2023, according to data from National Bank.

Let’s explore what makes international developed markets an attractive investment opportunity compared to North America. We’ll examine a well-established index that tracks the progress of companies in these markets and discuss how Canadians can invest in these regions.

Currently, price-to-earnings ratios (P/E) across international developed markets are lower than those in the United States, as can be seen in the chart below of major countries in MSCI’s EAFE Index.

P/E ratios help investors find the market value of a company’s stock when compared against the company’s earnings. A high P/E ratio might indicate a stock is overvalued or that investors expect high growth from the company.

Bank of America’s (BofA) June 2024 fund manager survey highlighted that global asset managers have made their highest investment in Eurozone stocks since January 2022. BofA’s survey of 206 asset managers – which collectively oversee US$604 billion under management – found that they’re 30% overweight in the region.

Robert Almeida, Global Investment Strategist at MFS Investment Management told Bloomberg News that “Europe is certainly more attractive … there’s less earnings risk than in the U.S. and less valuation risk, too.”

Stock valuations and the expectations of a boost in business activity in Europe appear to be driving optimism in the region. As you can see from this chart, the Stoxx 600’s forward 12-month P/E ratio is near a record low relative to the S&P 500.

As U.S. markets continue to trade near all-time highs, value-seeking investors might want to consider Europe. European equities trade at discounts compared to their U.S. counterparts, presenting an attractive opportunity.

Originally coined by a Bank of America strategist, “The Magnificent Seven” is the name given to a group of high-profile technology companies that include NVIDIA, Microsoft and Apple. The Magnificent Seven symbolize technological advancement and their pivotal role in both the North American and global markets.

But Europe has its elite group of high-performing companies dubbed “The Magnificent Eleven” or “GRANOLAS” – a term first coined by Goldman Sachs in 2020 based on a loose acronym of the stocks’ names. 

These are the firms that are part of this elite European group:

“In the U.S., tech is still likely to remain the long-term winner,” Goldman Sachs strategists wrote in a note cited by Bloomberg News. “In Europe, it’s more likely to be a combination of structurally strong and/or stable sectors: Healthcare, Consumer Staples and Tech.”

This group of European companies represents around a quarter of the STOXX 600’s market cap, showcasing robust earnings growth, lower volatility, high and stable margins, strong balance sheets, and durable dividends.

“The leaders of the forthcoming market cycle will be companies that are able to generate earnings growth, sustainable dividend payouts and have healthy balance sheets,” the Goldman Sachs strategists wrote.

While “The Magnificent Seven” focuses primarily on technology, the GRANOLAS span the Health Care, Consumer Cyclical, Consumer Defensive and Technology sectors. When compared to the “Magnificent 7,” one of the best-performing U.S. equity baskets, GRANOLAS offers much less volatility. Including European equities such as these in a portfolio could help boost risk-adjusted returns.

TRACKING DEVELOPED MARKETS: MSCI’S EAFE INDEX

The MSCI EAFE Index was launched on March 31, 1986. EAFE is short for “Europe, Australasia, and the Far East”.

The index covers 21 developed markets with 766 constituents and covers approximately 85% of the free float-adjusted market capitalization in each of the 21 countries it covers. That’s a total market cap of US$17 billion as at June 30, 2024.

Let’s take a closer look at three of the countries included in MSCI’s EAFE Index:

Global X has partnered with MSCI to offer four direct ways to invest in developed markets, based on an investor’s risk exposure and performance potential:

*Plus applicable sales tax
**Trades in U.S. dollars

For traditional emerging markets exposure, investors might consider EAFX, which tracks the MSCI EAFE Index, providing physical replication and exposure.

EACC employs an options-writing program as part of its active management strategy, specifically covered call overlays. This is an investment strategy designed to generate the potential for additional income over and above the income from its underlying index exposure. As an options-based ETF, EACC seeks to generate higher yields relative to its underlying index and may result in higher levels of monthly income for investors. EAFL uses leverage, a strategy that can potentially magnify both gains and losses and the fund aims to generate approximately 1.25x the return of its underlying index. 

With EACL, Canadian investors have access to developed markets outside North America with light leverage and a covered call overlay. This can potentially enhance growth and income potential while still providing underlying MSCI EAFE Index exposure.

Global X offers a world of opportunity with global possibilities. For more information on our extensive suite of ETFs, visit www.GlobalX.ca.

DISCLAIMERS

Commissions, management fees, and expenses all may be associated with an investment in products (the “Global X Funds”) managed by Global X Investments Canada Inc. The Global X Funds are not guaranteed, their values change frequently and past performance may not be repeated.  Certain Global X Funds may have exposure to leveraged investment techniques that magnify gains and losses which may result in greater volatility in value and could be subject to aggressive investment risk and price volatility risk. Such risks are described in the prospectus. The prospectus contains important detailed information about the Global X Funds. Please read the relevant prospectus before investing.

Certain ETFs are alternative investment funds (“Alternative ETFs”) within the meaning of the National Instrument 81-102 Investment Funds (“NI 81-102”) and are permitted to use strategies generally prohibited by conventional mutual funds, such as the ability to invest more than 10% of their net asset value in securities of a single issuer, the ability to borrow cash, to short sell beyond the limits prescribed for conventional mutual funds and to employ leverage of up to 300% of net asset value. While these strategies will only be used in accordance with the investment objectives and strategies of the Alternative ETFs, during certain market conditions they may accelerate the risk that an investment in ETF Shares of such Alternative ETF decreases in value. The Alternative ETFs will comply with all requirements of NI 81-102, as such requirements may be modified by exemptive relief obtained on behalf of the ETF.

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Published July 16, 2024