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First of all, there's the opportunity argument. International represents roughly 50 percent
of the market opportunity and equity space globally, but of course the most compelling
argument is the potential for clients to get an attractive level of return at the same
time as potentially diversifying away from U.S. domestic exposure.
The macro headlines that suggested there was a lot of volatility in international markets
are actually abating and, to some degree, we're starting to see a tailwind in terms
of macro news flow--better economic data or at least an improving economic flow from many
markets, as well as the corporate environment, particularly in terms of earnings starting
to improve. We often think because a company's based or
domiciled in a particular market, for example, Europe, that they're primarily concerned or
exposed to the local market and the local economic conditions. That's a broad generalization.
While some companies experience and live the local market because that's where they are
primarily doing business, many other companies, for example, many European companies, are
truly global in nature, often having businesses and earnings lines in other parts of the world,
including the Americas and Asia. The world remains a very diverse place both
from an equity and an economic perspective. If we think of the current economic environment,
the U.S. economy continues to recover, albeit at a reasonably slow rate; Europe is only
just starting to recover, turning from negative economic numbers to positive economic numbers;
Japan more recently has seen signs of optimism, of course, the key question is whether that
can continue into the future; and there's a large question mark out there among commentators
around the outlook for emerging markets. We should remember that emerging markets is a
term that covers a variety of environments and economies. One of the key questions, of
course, is where the Chinese economy is going. Certainly growth in China appears to be slowing,
but even at slower levels, the actual numbers or the pace of growth remains very, very robust,
particularly when compared to developed markets like the U.S. and Europe.
We're often asked which markets or countries look interesting. I would approach it slightly
differently by suggesting what we should be doing is focusing on which companies look
interesting, which companies do we believe can achieve sustainable growth or improving
growth in the future, where that potential for growth is not fully reflected in today's
share price. Sometimes the macro environment, which tends
to lead us to discuss broader markets or countries, creates buying opportunities. For instance,
we think of the negativity that's surrounding much of peripheral Europe, for example, Spain.
That did cause many well-run Spanish companies to become perhaps a little too cheap or undervalued
versus their long-term potential. So as an individual stock picker this allows us the
opportunity to access those markets through individual companies.
Current opportunities definitely are leaning toward the pro-cyclical stance--again the
economic recovering in Europe, but again a slow economic recovery, but that slow economic
recovery, because of operational leverage, because of the quality of corporate balance
sheets and because of the opportunity for an improving margin environment, means that
earnings will continue or should continue to improve over the next couple of years.
Given the price we're being asked to pay today for those earnings, we would suggest there's
an opportunity for clients to deliver both attractive returns and, if managers are successful
in choosing the right individual companies, to outperform broader benchmarks. In a relative
valuation sense, many European stocks in particular continue to look undervalued versus their
U.S. counterparts. Greece has certainly attracted a lot of headlines.
I would point out from an investable universe sense, Greece is a very, very small market
and most active managers would have little, if any, exposure to Greek equities currently,
but certainly the international marketplace is one where active management should be advocated.
If we think of a passive or an index replicator, a manager that's simply seeking to match the
benchmark, they will own both good and bad stocks at the same time. A good active manager
is not only looking to invest in a good business, but looking to invest in a good business at
an attractive price.