Despite continued economic weakness, particularly in Europe and parts of Asia, these regions offer attractive entry points with low valuations for investors looking for companies with strong free cash flows, according to Principal Asset Management’s CIO George Maris.

“There has been a suggestion that the US has led the way over the past few years, while international stocks have been falling.” But that’s not quite accurate,” he said, pointing to India and Japan as some of the strongest markets over the past few years that have kept pace with the Nasdaq.

Maris noted that India’s growth is driven by capital outflows from China, while Japan requires corporate reforms to reignite inflation and end decades of stagnation.

He also added that the international equity market presents "promising examples of companies" in mining, defense and insurance, demonstrating sustainable free cash flow growth and attractive valuations, providing opportunities outside the US.

Ultimately, Maris emphasized the importance of focusing on economically sensitive sectors and markets, adding that by using concepts like implied alpha, investors can build more sustainable international equity portfolios.

"In today's environment, international equity investors need to focus their efforts on economically sensitive sectors and markets," Maris said.

"Recent significant government measures, including monetary easing and stimulative fiscal policies, have boosted growth activities and benefited strong, competitively-advantaged companies."

Great Britain and China

But Maris said there are two markets in particular that deserve investors' attention because their downgrades make them "intriguing."

The first is the UK equity market, which is dealing with ongoing post-Brexit challenges, becoming one of the most undervalued markets globally.

Maris highlighted that many UK firms are multinationals, generating a significant proportion of their free cash flow from markets outside the UK, primarily the US, often exceeding their domestic revenues.

“However, their share prices often do not fully reflect this global exposure, presenting potential arbitrage opportunities. UK companies that have re-listed their shares in the US often experience a significant increase in market value, leading to significant shareholder appreciation,” he said.

The second undervalued market is Chinese stocks, which have drawn significant pessimism from investors due to structural issues such as geopolitical tensions and concerns about the rule of law.

But according to Maris, investor pessimism is often extreme, given that Chinese valuations are deeply discounted relative to their history and peers.

He also described recent policy decisions by the Chinese government and the People's Bank of China as pro-market.

"While there is heated debate among investors over whether these steps are enough to turn around the economy and solve China's structural problems, there is an emerging recognition that important key structural problems are being addressed in a meaningful way," he said.

"Corporate governance in China has improved over the past few years, making the risk-reward setup for China intriguing."