Attractive Entry Point for International Equity Investing
Valuations and differentials on stock prices and currencies make international equities attractive, says David Herro.
Here are highlights from Herro’s international investing outlook.
- Value in European financials: We see the greatest value and the greatest opportunity in European equities, especially in those companies that are in the financial sector, which finally will benefit from rising interest rates. That's right. Financial companies in Europe will actually be beneficiaries of the rising interest rate environment after having suffered through low to negative interest rates. Also, we believe companies involved in industrials and consumer discretionary, as well as multinational European businesses, which are still doing quite well from an earnings and cash flow perspective, are good opportunities based on valuation, especially with what's happened this year where share prices have fallen despite rising earnings.
- Time to revisit China: First, we saw big changes in the regulatory environment negatively impacting the prices of especially Chinese tech stocks, which are their strongest businesses and strongest industries. We had to adjust our valuations of some of these Chinese businesses, but we still wanted to stay involved because of the high quality of these companies. Second, you’ve had the Covid policies causing these periodic lockdowns in huge 20 million people cities, which causes a very start and stop kind of economic environment. So this has hit share prices. We view this as more temporary, and the price impact perhaps has been overdone. As a result, we’re generally seeing better opportunity in Chinese equities today.
- Factors favoring value: Value has been out of favor, literally, since the end of the global financial crisis. There's been a few attempts at a comeback, and it looked like in late ’19, early 2020, that value would make a comeback; then the pandemic came. Then the war came. Meantime, the price differential between value and non-value has almost never been wider. And so between the huge discount, which value stocks are trading at, and a stabilization of the global economic environment, I do believe that value stocks are in position to have a very strong mid-term recovery.
- Value opportunity in volatility: What we try to do is take advantage of this volatility. If the price goes down violently on a good quality business, where there is not a corresponding decline in value, we use that as an opportunity to add to the position. Utilizing volatility is an important tool at creating the portfolio forward looking to make sure that you have more of your assets concentrated in those stocks which we think will offer the higher future returns.
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