International Value Investing: How to Find Undervalued Stocks Outside the US
Most retail investors concentrate their portfolios in US equities -- and it is easy to understand why. The S&P 500 has delivered exceptional returns over the past decade, US companies dominate global technology and consumer platforms, and information about American stocks is abundant. But this home bias comes at a cost: the US market is, by most historical valuation metrics, among the most expensive in the world. Meanwhile, Japan, Europe, and select emerging markets regularly trade at steep discounts to US comparables. For disciplined value investors, that gap represents opportunity.
This article is for educational purposes only and does not constitute financial advice.
Why Global Diversification Improves Value Investing
Value investing is fundamentally about the difference between price and intrinsic value. If the entire market you are searching in is expensive, finding genuinely cheap stocks requires either lower standards or a willingness to go where others are not looking. International diversification solves this problem structurally.
Different markets move through valuation cycles at different times. The US was deeply cheap in 1982 and relatively cheap again in 2009. Japanese equities were priced for perfection in 1989, then remained in a prolonged bear market for over two decades. European banks were distressed during the sovereign debt crisis of 2011-2012. Emerging markets experienced deep corrections in 2015-2016 and again in 2022. These cycles are not synchronized, which means a global opportunity set almost always contains pockets of genuine cheapness even when domestic markets are stretched.
Beyond cyclical valuation differences, structural factors create persistent gaps. Accounting differences (IFRS versus US GAAP), investor familiarity, institutional constraints (many large funds are restricted to domestic equities), and market liquidity preferences all contribute to mispricing that patient, fundamental-oriented investors can exploit.
The Case for Japan: The World's Largest Value Opportunity
Japan is arguably the most compelling value market for fundamental investors right now, and has been for years. The catalysts are aligning in ways that make the thesis particularly actionable.
Buffett's Sogo Shosha Trade
In 2020, Berkshire Hathaway disclosed significant stakes in the five Japanese trading houses (sogo shosha): Itochu, Marubeni, Mitsubishi, Mitsui, and Sumitomo. Buffett subsequently increased those positions and in 2023 made a point of traveling to Japan -- his first international trip since the pandemic -- signaling conviction. His rationale was straightforward: these diversified conglomerates were trading at extremely low multiples (single-digit P/Es, P/B well below 1), paying growing dividends, buying back stock aggressively, and effectively self-funding. The trade has delivered exceptional returns and validated the broader Japanese value thesis for global audiences.
Persistent P/B < 1 Universe
Japan has one of the largest concentrations of companies trading below book value anywhere in the world. For years, roughly half of all Tokyo Stock Exchange-listed companies traded at P/B below 1.0 -- meaning the market implied that these businesses were worth less as going concerns than their net assets. In mature western markets, persistent P/B < 1 usually signals either financial distress or genuinely poor returns on capital. In Japan, many of these companies are profitable, debt-free, and sitting on massive cash hoards. The gap existed because of corporate governance and capital allocation habits that the market had largely given up on.
Tokyo Stock Exchange Governance Reforms
The game-changer is structural. In 2023, the Tokyo Stock Exchange directly pressured listed companies trading below book value to disclose plans for improving capital efficiency or face delisting warnings. This was unprecedented in Japan's corporate culture and set off a wave of share buybacks, dividend increases, cross-shareholding unwinding, and strategic reviews. The structural tailwind for Japanese value stocks is genuinely new.
For international value investors, Japan offers quantitative cheapness combined with a governance reform catalyst -- an unusual combination.
European Value: The FTSE, DAX, and CAC Discount
European equities have historically traded at significant discounts to US equities on almost every multiple: P/E, EV/EBITDA, P/FCF, and P/B. This discount has persisted for over a decade and is partly structural (European markets have heavier weightings in banks, energy, and industrials versus US technology dominance) and partly reflects genuine differences in growth expectations.
On EV/EBITDA, European markets often trade at 7-9x versus 12-15x for comparable US sectors. For a value investor asking "which market gives me more cash flow per dollar invested," Europe has consistently offered better starting valuations.
UK (FTSE 100 and FTSE 250): The British market has traded at an unusually wide discount since Brexit uncertainty emerged in 2016. Many FTSE 100 companies are global businesses with most revenues outside the UK but listed in London -- making the "UK discount" partly illogical. UK-listed consumer goods, energy majors, pharmaceutical companies, and financial services firms have offered compelling valuations for patient investors.
Germany (DAX): German industrials -- engineering, automotive, chemicals, and specialty manufacturing -- often trade cheaply relative to their global competitive positions. The auto sector has been particularly controversial given EV transition uncertainty, but investors who can look through near-term noise may find durable franchises at reasonable prices.
France (CAC 40): French luxury and consumer companies have, if anything, commanded premiums. But French industrials, utilities, and financial companies have often been cheap. The broader CAC 40 has traded at lower multiples than the S&P 500 on most metrics.
The key insight for European value investing is that the discount is partly justified (lower growth, regulation, labour market rigidity) and partly sentiment-driven and reverting. The job of the fundamental investor is to determine which part of the discount is permanent and which is temporary.
Emerging Markets: Higher Hurdles, Higher Potential Rewards
Emerging markets (EM) offer some of the most extreme valuation discounts globally, but they also carry risks that require a meaningfully higher return threshold.
Why EM can be cheap: Political risk, currency risk, governance risk, weaker rule of law, minority shareholder protection issues, and plain investor unfamiliarity all depress valuations. These are real risks, not imaginary ones, and they deserve to be priced.
The ROIC premium requirement: When investing in an emerging market business, the required ROIC to create value is higher because WACC is higher (country risk premium is additive, as we will cover below). A Brazilian consumer company needs to earn considerably more on its invested capital than a US comparable just to clear its cost of capital hurdle. Before buying any EM stock, verify that the ROIC comfortably exceeds the country-adjusted WACC.
Currency considerations: EM investing introduces currency risk that is absent in domestic investing. A stock that doubles in local currency terms produces a very different return in dollars if the local currency depreciates 40% against the dollar during the same period. This is not always a reason to avoid EM, but it must be understood and priced.
Where genuine EM value exists: India has a large and liquid equity market with strong long-term growth dynamics, though valuations have become less extreme. Southeast Asia (Indonesia, Vietnam, Philippines) has rapidly growing middle classes with undervalued consumer and financial companies. South Korea trades at a structural discount (the "Korea discount") due to the chaebol structure and governance concerns, creating opportunities in cash-rich, export-competitive businesses. Brazil and Mexico offer cycles of extreme cheapness during commodity or political distress.
Adjusting DCF for Country Risk Premium: The Damodaran Methodology
When building a DCF model for a non-US company, WACC must be adjusted for country-specific risk. The standard approach, developed by Aswath Damodaran at NYU Stern, adds a Country Risk Premium (CRP) to the equity risk premium in the CAPM formula.
Basic structure:
Ke = Rf + β × (ERP + CRP)
Or alternatively, the CRP can be added directly:
Ke = US_Ke + CRP
How Damodaran estimates CRP: He starts with the default spread on each country's dollar-denominated sovereign bonds over US Treasuries. That sovereign default spread is then scaled upward to reflect that equity is riskier than debt. The scaling factor is typically the ratio of equity market volatility to bond market volatility for that country -- historically around 1.5x for most emerging markets.
Practical example: If Brazil's sovereign bond spread over US Treasuries is 2.5%, and the equity/bond volatility ratio is 1.5, the Brazil CRP is approximately 3.75%. A US company might have WACC of 9%. A comparable Brazilian company would add the 3.75% CRP, yielding a WACC of roughly 12.75% before any other adjustments. This higher discount rate means future cash flows are worth less today -- the business must earn more to justify the same price.
Damodaran publishes updated country risk premiums for over 160 countries annually at his NYU website. These are the reference standard used by practitioners worldwide.
Currency of cash flows matters: Always denominate both cash flows and the discount rate in the same currency. If you model a Brazilian company's cash flows in Brazilian reais, use a Brazilian real discount rate (Rf is Brazil's real rate, not the US 10-year). If you convert to USD cash flows, use the USD-based discount rate including CRP.
Currency Risk Management: Hedge or Accept?
For long-term value investors, currency risk is a genuine consideration but not necessarily a disqualifier.
Arguments for accepting currency risk: Over long holding periods (5-10+ years), currency moves tend to revert toward purchasing power parity. A deeply undervalued business remains undervalued regardless of short-term currency noise. Buffett's Japan trade is unhedged -- he accepts the yen exposure. Currency hedging has costs (forward premiums, roll costs) that erode returns.
Arguments for hedging: If you are making a specific business bet and do not want currency to dominate the outcome, hedging via forward contracts or currency-hedged ETFs removes that variable. For shorter holding periods, currency volatility can swamp fundamental returns.
Practical approach for individual investors: For most individual investors, currency hedging is complex and expensive to implement on a stock-by-stock basis. The simpler approach is to size international positions appropriately so that adverse currency moves are manageable within the overall portfolio, and focus on businesses with strong enough fundamentals that the valuation discount absorbs reasonable currency deterioration.
Practical Screening Approach for International Value
Finding international value stocks requires the same discipline as domestic screening, adjusted for local market characteristics:
- Filter by valuation: P/B < 1.5, EV/EBITDA < 8, P/E < 12 are reasonable starting points in most non-US markets.
- Filter by quality: Require positive ROIC, FCF positive in at least 4 of the last 5 years, Altman Z-Score above 2.
- Adjust for country risk: Make sure your discount rate reflects the country risk premium before concluding anything is "cheap."
- Check capital allocation: Dividend yield, buyback history, and management's stated capital allocation priorities matter more in markets with governance concerns.
- Assess liquidity: Many attractive international companies have low trading volumes. Ensure you can build and exit a position without moving the market.
ValueMarkers covers 73 exchanges globally, which means the screening infrastructure for this exact process -- searching for undervalued companies across Japan, Europe, and emerging markets using consistent financial metrics -- is built into the platform. Rather than manually downloading data from dozens of sources with inconsistent accounting, you can apply consistent fundamental screens across the full global opportunity set.
The Bottom Line
The best value opportunities are where other investors are not looking. International equity markets -- particularly Japan in the current governance reform cycle, select European industries, and specific emerging markets with strong fundamentals -- regularly offer better valuations than the US market on fundamental metrics. The adjustment is adding country risk to your discount rate and remaining honest about currency exposure. With those adjustments made, international value investing is the same discipline as domestic value investing: buy good businesses at cheap prices, hold until value is recognized.
The global opportunity set available through ValueMarkers gives you the screening breadth to find these opportunities systematically rather than relying on chance or news flow.