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This week, three well-travelled portfolio managers offer their perspectives on international
equities. I’m Brian Jacobsen and you are On the Trading Desk.
This past December, we gathered a panel of three international portfolio managers to
get their insights as to where they see opportunities for the year ahead.
Dale Winner focuses on European equities. He explains his source of confidence in policy
responses to help limit downside risk to European financial institutions as that economy recovers.
I’ve been to Europe a few times this year, and two inflection points for me. And again,
we were in Europe a year ago. We tend to be in a year or two before consensus is. But
what was really reassuring is I went to a financial services conference in Brussels,
in the heart of Euro land, in July. And I came back really constructive on how adequate
the policy response to limit downside risk to the European banking sector. We believed
in that two years ago, to be very honest and we thought we were getting bargains with banks
trading at 0.4 times book, and were bargains and are still bargains. But the most important
thing that came out of that was the commitment to limit the downside risk in Europe. And
everyone’s seen the headlines; you’ve got “Super Mario” as the head of the central
bank there—just done an unbelievable job in reducing that downside, systemic risk.
And that came through from all the banks who presented at that conference in July, and
insurance companies. Saying, “we’ve increased our capital ratio, our liquidity is much better,
the downside risk is limited.” And that’s why you’ve had the rally in the third and
fourth quarter in Europe, particularly in the financials. So, our visits to companies
this year have been a bout reassurance in the downside. We believe, absolutely, in the
five-year upside for our stocks. There’s mean reversion that people are just missing
out on because they’re jaded, as it were, by the last three to five years in Europe.
Fixating on the last few years, instead of looking forward to the next few years is a
common mistake a lot of investors make. I think, if you look at some of the fundamental
changes that have taken place in the European markets, you’ll actually see that it could
be ripe with some opportunities. Next, let’s turn our attention to Allison Shimada. Allison
invests in a wide cross-section of emerging markets. She explains that even during turbulent
and volatile times, opportunity can still be found, with experience.
Well, I think it was a tale of two halves, basically. The first half of the year, really
favored better quality stocks. In our case those tend to coincide with dividend yield.
So, you know, there’s a lot factors to consider in emerging. It has been a tricky year. It
has been a year of stock selection. And the tapering didn’t happen. Then, money really
shifted to Europe and Japan, and the U.S. And I think that it’s been a year where
if you wanted the growth, where you would usually gone to emerging markets, you just
went to Japan. Because, you know, stocks had been depressed for 15 to 20 years, so, it’s
a very easy decision this year. But we are still hopeful that with experience you can
overcome that. And I really do like some volatility as well, because I do think that, with experience,
you can have the ability to go against the consensus, get in early, and make a different
decision than what the rest of the street would be making, or, not paying attention
to. And that’s what our analysts like to do.
The emerging markets are diverse in terms of country and also the companies that operate
there. Failure to discriminate amongst the different types of countries and companies
is actually a good way to fall into a pit, without seeing all the opportunities. Now,
let’s turn our attention to Jean-Baptiste Nadal. Jean Baptiste is keeping a keen eye
on U.S. monetary policy for the far-reaching affect it could have around the world as they
pick stocks in the year ahead. If you see the U.S. finally moving in the
way of tightening, we may see a strengthening of the U.S. dollar, and, maybe an acceleration
of the decline of the Yen, and, maybe the same in Europe. And it means when you pick
a stock, you have to be very careful of what kind of animal you’re buying into. So, I
tend to favor, in Japan, the export companies as opposed to really the domestic companies.
And also, I tend to favor, in Europe, those companies who are more exposed to the U.S.
dollar. It’s only on the margin, but, that’s really important in the selection. And obviously,
the strengthening of the dollar could also put some stress on some emerging markets.
So we have been looking at companies in India, in Malaysia, in the Philippines and so forth.
We are careful with the currency picture of those countries going forward. We prefer,
also, in India, focusing more on export companies with a global reach—a company like Tata
motors which is, essentially, land Rover and Jaguar. So, that’s how we think, for us,
the change in policy could really impact the way we pick stocks next year.
When investing internationally, it’s important to remember that currencies can also have
an effect on your portfolio’s performance when you translate it back into U.S. dollars.
That not only creates an added layer of complexity, but an added layer of opportunity. Now, I’d
like to leave you with a few of my key takeaways. It’s a big world. And there are many opportunities
in the U.S. But, perhaps even more outside the U.S. Looking outside the U.S. can help
diversify a portfolio and present you with more opportunities to help reach your financial
goals. That is all the time we have this week. Until
next time, I’m Brian Jacobsen, stay informed.