International Value Stocks Buck Recession Fears

• Last month, the ALPS International Sector Dividend Dogs ETF (IDOG) outpaced broad international and US indices, kept afloat by impressive earnings and cheap valuations. Despite global recessionary fears causing a rush to quality names to begin the year across Europe, better-than-expected economic growth and above-consensus company earnings have revived inflationary pressures, which could lead to a continued recovery in deep-value international names.  
  
  
• Leading IDOG’s Communication Services gains for the month of February, Telenor ASA (TEL NO, 2.27% weight*), rallied nearly 8% on the back of the company releasing 2023 EBITDA guidance in Nordic markets above analyst expectations, along with a proposed share buyback program following a 30% sale of its Norwegian fiber business. France’s largest mobile telecom provider, Orange SA (ORA FP, 2.20% weight*), also gained over 8% last month after reporting revenues and adjusted EBITDA above consensus estimates, citing inflationary costs being passed through to consumers. Adding to the recurring theme of pricing power within IDOG, Telefonica SA (TEF SM, 2.10% weight*), rose 7.80% on the month, moving higher after announcing price hikes during a 4Q earnings release that saw a slight miss on revenue for Spain’s largest phone company. 
  
  
• Consumer Discretionary names were also among the pack leaders last month, with automobile manufacturer, Stellantis NV (STLA US, 2.28% weight*), surging 11.45% after releasing 2022 Fiscal Year (FY) results showcasing +26% year-over-year net income thanks to six months of rising car sales in Europe. Riding the trend of an uptick of discretionary vehicle purchases and Electric Vehicle (EV) interest, Bayerische Motoren Werke (BMW) (BMW GR, 2.19% weight*), gained 2.40% in February, receiving an added boost from announced plans to invest €800 million in its San Luis Potosi, Mexico manufacturing plant to produce EVs. 
  
  
• Rounding out top movers in IDOG last month, industrial transport and logistics company, A.P. Mollner-Maersk (MAERSKB DC, 2.09% weight*), returned 8.13% after announcing a better-than-expected FY dividend payout of ~37.55%, cementing Maersk the largest indicated dividend yield among all Europe Stoxx 600 companies in February. Lastly, Japanese transportation service provider, Nippon Yusen (9101 JP, 2.20% weight*), and Japanese steel producer, Nippon Steel Corp. (5401 JP, 2.53% weight*), both saw gains of over 7% on positive 3Q earnings results driven by inflationary pricing trends in cyclical products. 

“The most serious mistakes investors make are performance chasing and focusing strictly on domestic opportunities. Stocks outside the US are reasonably cheap. Value stocks outside the US are very cheap, and we find many narratives relating to China, relating to Ukraine, for not investing outside the US. But the US is priced at more than twice the valuation multiples of non-US stocks.”

– Rob Arnott, Research Affiliates Chairman, February 27, 2023 Bloomberg TV Interview

Have International Equities Become Too Cheap to Ignore? 

• Over the past decade, US supremacy has outlasted any prolonged reversion of ex-US stock performance. However, a shift in the global investment landscape may be in the early stages favoring developed international equities, highlighted by attractive relative fundamentals, China’s reopening, and a ~10% drop in the Greenback since its peak in 2022. These encouraging factors, along with improving sentiment across European markets, have led to meaningful outperformance for developed international stocks year-to-date. For Europe in particular, a brightening economic outlook has led forward multiples¹ in all sectors to arrive at a discount compared to US equity sectors. While earnings revisions remain a major headwind, Europe and Developed Markets Ex-US lead the globe in positive forward earnings revisions, while the US and China trail by a wide margin, per Bloomberg.
  
  
• Persistent inflation paired with a higher-for-longer global interest rate backdrop favor developed international equities as cheaper valuations offer opportunities where US stocks appear expensive, predominantly for international value and cyclical sectors including energy, financials, materials and industrials based on their strong pricing power. For investors seeking exposure to Europe and discounted international stocks that are primed to narrow their historical spread in performance, The ALPS International Sector Dividend Dogs ETF (IDOG) offers a ~63% exposure to developed countries in Europe with an equal-weighted sector exposure, boasting a 4.16% yield across a portfolio of heavily discounted deep-value names. 

Source: Goldman Sachs Research, 02/17/2023

* Weight in IDOG as of 02/28/2023

¹ 24 month forward P/E, Goldman Sachs Research, 02/17/2023

• The last two decades have seen global growth far outpace global value, however, forward expectations see higher structural inflation levels benefitting a continued shift to value.
  
  
• International markets have a much greater value tilt than US stocks, with a 47% allocation to value sectors compared to US markets' 27%, per JPMorgan. 
  
  
• IDOG’s deep value methodology focuses on cheaper, high-yielding companies, exhibiting a 6.20x price-to-earnings (P/E) ratio compared to the STOXX 600 Europe P/E of 13.26x.

Performance Summary

Source: Bloomberg L.P., as of 02/28/2023

Performance data quoted represents past performance. Past performance is no guarantee of future results so that shares, when redeemed, may be worth more or less than their original cost. The investment return and principal value will fluctuate. Current performance may be higher or lower than the performance quoted. For current month-end performance call 1-866-759-5679 or visit www.alpsfunds.com. Performance includes reinvested distributions and capital gains.

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Top 10 Holdings

As of 02/28/2023, subject to change

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Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA): a measure of a company’s overall financial performance.

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Morningstar Developed Markets ex-North America Index: measures the performance of companies in developed markets ex-North America. It covers approximately 97% of the full market capitalization in the Developed Markets ex-North America. 

S-Network International Sector Dividend Dogs Index (IDOGX): a portfolio of stocks derived from a universe of mainly large capitalization stocks domiciled in developed markets outside the Americas (the “S-Network Developed Market (ex NA) Index”). The IDOGX methodology selects the five stocks in each of the ten GICS sectors that make up the universe which offer the highest dividend yields as of the last trading day of November. The fifty stocks that are selected for inclusion in the portfolio are equally weighted. 

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DOG001277  06/30/2023