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Why International Moat Stocks Could Start Outperforming


Nov. 20 2020, Updated 4:39 p.m. ET


Germany and Australia were the top contributors to index performance in July from a country perspective, and telecom, industrials, and financials were the top contributing sectors. Tencent (700 HK, -9.82%) was the poorest performer and leading detractor from the International Moat Index returns in July. Its share price decline further widened the company’s valuation gap between its current price and fair value of HKD 641.

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Market Realist

Chinese Internet giant Tencent Holdings (TCEHY) was the worst performer within the Morningstar International Moat Index (MOTI) in July, declining 9.8%. The stock has declined 10.5% year-to-date.

However, the stock recovered in August. Its revenue grew over 30% year-over-year or YoY in the second quarter while profits grew 22%. Social networks, online gaming, and online ads saw robust growth in the quarter.

The company is a leader in online gaming. The segment is likely to keep driving Tencent’s growth. Gaming revenue in China is forecast to reach a whopping $42 billion by 2022, according to GamesIndustry.biz. Tencent briefly breached the $500 billion valuation mark last year.

Tencent is likely to be one of the better performers of the international moat index, given its robust growth.

Yum China (YUMC) was another detractor in July, declining 6.2%. The stock is down 10% in 2018.

German stocks Siemens and BMW, as well as Australian stocks Magellan Financial Group and Brambles Limited, were some of the top performers of the index, making Germany and Australia the top performers by region.

While the Morningstar International Moat Index has been underperforming, its outlook could change due to mean reversion. Moat indexes have outperformed over the long term.


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