International value has bounced back: what should investors do now?
- TEBI
- Aug 15
- 8 min read
Updated: Aug 20
After more than a decade in the wilderness, international value stocks are staging a dramatic comeback. But this isn't a story about market timing — it's about the enduring power of evidence-based investing and the importance of geographic diversification.
International value stocks have delivered 11.6% annual outperformance since July 2020. This isn't a statistical blip. It marks a fundamental shift that challenges everything the financial press has written about the supposed death of value investing.
Warren Buffett's favourite holding period is forever—a philosophy that sounds simple until you're watching your value portfolio lag growth stocks for a decade. For international value investors, 2010 to 2020 felt like an eternity. But as the 126th Psalm reminds us, "those who sow in tears will reap with cries of joy." That wisdom has taken on new meaning for investors willing to look beyond their home markets.
The numbers that changed everything
Since July 2020, international value has outperformed growth by 11.6% annually in developed international markets, according to new research from Verdad Capital. This performance has restored the five-year rolling value premium to positive territory for the first time since the financial crisis.
The contrast with US markets is stark. American value investors endure perpetual disappointment whilst their international counterparts quietly celebrate. Larry Swedroe's latest analysis demonstrates this divergence clearly: over five years, international large value stocks have delivered exceptional outperformance of approximately 8% annually. Small value has added 6% annually compared to growth counterparts.
This reversal tells a story that goes far deeper than recent market movements. It's a tale of two continents, different economic structures, and the persistent power of valuation discipline in markets where fundamentals still matter.
Why international value is working now
The renaissance isn't happening in a vacuum. Three powerful forces are converging to create what may be the most attractive setup for value investing in over two decades.
Japan's governance revolution
Corporate governance reforms have unleashed a tsunami of shareholder-friendly policies in Japan. Firms announced record shareholder distributions in the first half of 2025, building on previous records set in each of the past three fiscal years. This isn't financial engineering—it marks a fundamental shift in how Japanese companies view shareholders.
The transformation is most pronounced among small and mid-cap companies. Most firms still trade at depressed multiples despite improving fundamentals. Large-cap Japanese stocks have garnered global attention, but the greatest opportunities remain in overlooked corners where reform adoption is still nascent.
Europe's confidence revival
European markets are experiencing their own renaissance. The Germany-based Sentix Economic Index, which polls over 1,000 investors including 208 institutions, shows dramatic sentiment improvement.
After years of pessimism following Russia's invasion of Ukraine, investor confidence has climbed from deeply negative territory (-18 at the start of 2025) to neutral (0.2 by June). This improvement reflects more than sentiment. Eurozone inflation has returned to the ECB's 2% target. Germany has approved a €1 trillion infrastructure and defence package.
For value stocks priced for perpetual pessimism, these developments provide powerful re-rating catalysts.
The rising rate environment
The shift away from ultra-low rates has fundamentally altered the investment landscape. Financial services stocks — a value portfolio cornerstone — have been lifted by higher rates across Japan and Europe. Energy companies have benefited from geopolitical shifts and renewed energy security focus.
This isn't temporary sector rotation. It marks structural change in the relative attractiveness of different business models and investment styles.
The double discount opportunity
Performance tells us what happened. Valuation tells us what might happen next. International value presents what Verdad researchers call a "double discount" — extreme cheapness on two dimensions simultaneously.
The first discount exists within international markets. Value stocks currently trade at price-to-book ratios (the ratio of share price to book value per share) relative to growth stocks last seen during the dot-com bubble. The current ratio of 0.15x compares to a historical median of 0.24x—a spread wider than at any point since the late 1990s technology mania.
The second discount is even more dramatic. International markets as a whole trade at their widest discount relative to US markets since 1976. At 0.43x, the international-to-US price-to-book ratio sits far below its historical median of 0.79x.
This creates potential for two distinct catalysts:
Mean reversion within international markets as value spreads narrow
A closing gap between international and US market valuations
The combination offers what may be one of the most compelling risk-adjusted opportunities in global equities.
The academic evidence is overwhelming
Sceptics might dismiss recent performance as temporary, but academic evidence for international value spans decades and multiple methodologies. Seven major studies published over two decades provide robust support for the persistence and pervasiveness of value premiums across global markets.
Geographic universality
Asness, Moskowitz, and Pedersen's landmark 2013 study found "a significant return premium for value in every stock market" they examined, with Japan showing the strongest equity value performance
Fama and French's 2012 international study confirmed value premiums across all four major regions: North America, Europe, Japan, and Asia Pacific
Hou, Karolyi, and Kho's comprehensive 2011 study of 40 countries found value premiums "pervasive across developed markets and present, though weaker, in many emerging markets"
Factor persistence despite academic publication
McLean and Pontiff's 2016 research on factor decay found that "value-related factors tend to be more persistent than some anomaly-based factors" even after academic publication. While many investment factors see returns decline by approximately one-third after being documented, value has shown remarkable resilience.
The international evidence is particularly striking. Post-publication declines in international markets were "smaller, possibly reflecting slower diffusion of ideas and capital." This suggests international value may offer structural advantages over its US counterpart in maintaining persistent premiums.
Theoretical foundations
Campbell and Vuolteenaho's work on "bad beta" (higher sensitivity to macroeconomic discount-rate news that hurts during recessions) provides theoretical foundation for value cycles. Value stocks' higher bad beta explains their higher average returns as compensation for macroeconomic risk.
Cohen, Polk, and Vuolteenaho's research on value spreads offers additional insight. Wide spreads predict higher future value returns because they signal greater mispricing or risk compensation. Their key insight applies globally: "The value spread can be interpreted as a price of risk and should have predictive content in any equity market where value risk is priced."
The futility of factor timing
The academic evidence reveals something crucial: the near-impossibility of timing value's cyclical periods. Arnott, Harvey, Kalesnik, and Linnainmaa's research emphasises that "even robust factors like value go through long periods of underperformance, sometimes a decade or more."
This cyclicality isn't a bug — it's a feature. "Investors must withstand drawdowns to earn the premium." Value premium persistence is "tied to structural risk or behavioural bias, not to temporary mispricing."
Value premiums are "often strongest following market downturns or crises, weaker in long bull markets," according to research. The 2010-2020 period represented exactly the kind of long bull market that typically challenges value investing. Ultra-low rates, quantitative easing, and platform technology rise created an environment where growth stocks could seemingly defy gravity indefinitely.
As previous research has shown, attempting to time these cycles is futile. Investors who abandoned value strategies during the difficult 2010s missed early stages of the current recovery.
This is why factor timing, despite superficial appeal, fundamentally misunderstands how risk premiums work. As extensive research demonstrates, factors do work, but don't try to time them. The premium comes precisely from accepting extended underperformance risk.
Why this time isn't different
The current international value resurgence isn't unprecedented—it's predictable. Historical analysis shows value premiums are cyclical but ultimately mean-reverting when spreads reach extreme levels.
Current valuation spreads in international markets mirror those seen during previous attractive value investing periods. While timing is impossible, recognising extreme valuations provides useful context for long-term expectations.
The lesson from decades of evidence isn't that value premiums are guaranteed — no investment outcome ever is. Rather, patient investors who maintain discipline through difficult periods are more likely to capture the risk premiums markets offer over time.
The international value opportunity: lessons from seven decades of evidence
The convergence of compelling valuations, improving fundamentals, and robust academic evidence creates a powerful case for international value exposure. But this isn't an argument for tactical allocation or market timing. It's recognition that factor premiums are global phenomena, and geographic diversification applies to investment styles just as much as individual securities.
International markets provide something increasingly rare in US markets: the opportunity to buy genuinely cheap companies at reasonable prices. Whether measured by book value, earnings, or cash flow, international value stocks trade at discounts that would have been unthinkable just years ago.
A framework for patient capital
The evidence suggests several principles for investors considering international value exposure:
Geographic diversification matters for factors, not just securities. The dramatic performance divergence between US and international value demonstrates that factor premiums aren't uniformly distributed across markets. Concentrating factor exposure in a single geography introduces unnecessary risk.
Valuation spreads contain information about future returns. Current spreads in international markets mirror those seen during previous attractive value investing periods. While timing is impossible, recognising extreme valuations provides useful context for long-term expectations.
Small and mid-cap companies offer additional opportunities. Academic research consistently shows value premiums are strongest among smaller companies in most markets. The reform story in Japan and recovery narrative in Europe are particularly compelling for companies overlooked by global investors.
Factor premiums require factor discipline. Successful factor investing requires accepting extended underperformance periods. Investors who cannot stomach decade-long drawdowns should not attempt factor-based strategies.
Economic cycles drive factor performance, but predicting them is impossible. Higher rates, inflation concerns, and geopolitical uncertainty may favour value stocks, but building portfolios around macro predictions is dangerous.
The long view
The international value resurgence isn't vindication of tactical positioning or superior market timing. It reminds us that patient investors who maintain exposure to risk factors through difficult periods are more likely to capture the premiums those factors offer over time.
Academic research spanning multiple decades and dozens of countries provides compelling evidence that value premiums are persistent features of international equity markets. The current combination of attractive valuations and improving fundamentals simply makes that case more obvious than it has been in years.
For evidence-based investors, the message is clear: international value deserves a permanent place in diversified portfolios, not because we can predict when it will outperform, but because evidence suggests it will continue offering risk premiums over long horizons. As recent research has repeatedly shown, testing the patience of value investors is simply what markets do. The reward for that patience, particularly in international markets, may be more compelling today than it has been in over a generation.
The tears have been sown. Now comes the patient work of reaping what decades of academic research suggest should eventually follow: long-term risk-adjusted returns for those disciplined enough to stay the course. The evidence suggests value investing isn't dead — it just moved overseas.
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