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Thinking Small to Take on International Waters

May 26, 2023

The international arena is a compelling space in today’s market environment. While some believe domestic equity valuations are still too high, international equity valuations are near decade lows relative to the U.S. Additionally, dividend yield is higher in non-U.S. markets, providing income potential during times of heightened volatility. The combination of these factors represents a potentially attractive entry point for investors with a long-term focus.

  • In Q1 2023, the combination of rising stock prices and lower earnings for U.S. equities (S&P 500) has resulted in a higher valuation premium relative to non-US equities.
  • Dividend yield in non-U.S. markets is more attractive than the S&P 500 yield.
  • “Risk Free” yield on 10-year US Treasury is also 176 basis points higher than the S&P 500 dividend yield.

Bar chart displaying P/E, P/B, EV/EBITDA, Dividend Yield for S&P 500, EAFE, EAFE SMALL, EM, EM Small, Europe, and Japan.

How do you begin to navigate the vast expanse of international waters? Are allocations to international large cap equities a sound strategy? What about growth or value? It is our view that thinking smaller could potentially be an effective way to access opportunities in the international arena. We believe international small caps may be able to provide strong returns when compared to other non-U.S. asset classes, and can potentially be a durable, diversifying addition to international allocations.

  • Over full market cycles, capital flows have tended to favor areas of higher productivity.
  • Non-U.S. small cap has consistently outperformed non-U.S. large cap since 2001, as many index constituents are nimbler, exposed to attractive mega-trends, and domestic demand dynamics, as well as have better orientation on corporate governance than their large capitalization peers.
  • Non-U.S. small cap value stocks materially outperform their growth peers.
  • Note that the dynamism of the large capitalization growth stocks in the U.S., such as Apple, Alphabet, Facebook, etc. are much less prevalent outside the U.S.

Line graph showing Growth of $10,000 invested on December 31, 2000. (as of Mar. 31, 2023) Compares EAFE Small Value, EAFE Small Growth, EAFE Value, and EAFE Growth. Source: MSCI Inc. Hypothetical for Illustrative purposes only. References to specific company securities are for illustration only and should not be construed as an offer or solicitation from Harbor Capital to buy or sell any securities.

It is our view that small cap equities deserve serious consideration when discussing international portfolio allocations. Strong historical performance combined with potentially attractive entry point signals create a compelling story worthy of exploring. Learn more about small caps both internationally and domestically: Small Caps – Is it time to be greedy?

Important Information

Investors should carefully consider the investment objectives, risks, charges and expenses of a Harbor fund before investing. To obtain a summary prospectus or prospectus for this and other information, visit harborcapital.com or call 800-422-1050. Read it carefully before investing.

The views expressed herein may not be reflective of current opinions, are subject to change without prior notice, and should not be considered investment advice.

Past performance is no guarantee of future results.

There is no guarantee that the investment objective of the Fund will be achieved. Stock markets are volatile and equity values can decline significantly in response to adverse issuer, political, regulatory, market and economic conditions. Investing in international and emerging markets poses special risks, including potentially greater price volatility due to social, political and economic factors, as well as currency exchange rate fluctuations. These risks are more severe for securities of issuers in emerging market regions. Stocks of small cap companies pose special risks, including possible illiquidity and greater price volatility than stocks of larger, more established companies.

The MSCI EAFE Small Cap Index is an equity index which captures small cap representation across developed markets countries around the world, excluding the US and Canada. The MSCI EAFE Large Cap Index is an equity index which captures large cap representation across developed markets countries around the world, excluding the US and Canada. With 335 constituents, the index covers approximately 70% of the free float- adjusted market capitalization in each country. The MSCI EAFE Small Cap Value Index captures small cap securities exhibiting overall value style characteristics across developed markets countries around the world, excluding the US and Canada. The value investment style characteristics for index construction are defined using three variables: book value to price, 12-month forward earnings to price and dividend yield.

This material may reference countries which may be generally the subject of selective sanctions programs administered. Readers of this commentary are solely responsible for ensuring that their investment activities in relation to any sanctioned country are carried out in compliance with applicable laws, rules or policies.

Hypothetical for illustrative purposes only. Forecast and estimates are based on hypothetical assumptions and for informational purposes only. This material does not constitute investment advice and should not be viewed as a current or past recommendation or a solicitation of an offer to buy or sell any securities or to adopt any investment strategy. The information presented does not represent the results that any particular investor may actually attain. Actual results will differ, and may differ substantially, from the hypothetical information provided.

“Risk Free” yield is the theoretical yield that an investor would expect on an investment with zero risk.

A basis point is one hundredth of 1 percentage point.

Price-to-earnings (P/E) Ratio is the ratio of a company's share price to the company's earnings per share. The ratio is used for valuing companies and to find out whether they are overvalued or undervalued.

Price-to-Book (P/B) Ratio compares a company's market value to its book value. The market value of a company is its share price multiplied by the number of outstanding shares. The book value is the net assets of a company. "Net" is the index total return (including dividends), minus applicable taxes.

The EV/EBITDA Multiple compares the total value of a company's operations (EV) relative to its earnings before interest, taxes, depreciation, and amortization (EBITDA). In practice, the EV/EBITDA multiple is frequently used in relative valuation to compare different companies in the same (or similar) sector.

Dividend Yield is the percentage a company pays out in dividends each year relative to its stock price.

Distributed by Harbor Funds Distributors, Inc.



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Investing involves risk and the potential loss of capital.

Investors should carefully consider the investment objectives, risks, charges and expenses of a fund before investing. To obtain a summary prospectus or prospectus for this and other information, click here or call 800-422-1050. Read it carefully before investing.

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