When it comes to analysing markets, David Herro, Co-CIO – International Equities at Harris | Oakmark, has seen it all. That said, the 2025 season is something different. After all, a lot has changed in a short space of time. Just compare what institutional investors told us were their top portfolio risks in November 2024 (valuations and interest rates) with what wealth managers said in January 2025 (volatility and inflation). What could have possibly changed since October 2024? And how does this year’s volatility change conventional wisdom on value investing?

In this Q&A, David Herro answers questions based on some of the responses to our recent Individual Investor Survey¹, to see if investor expectations align with our experts’ perceptions of stock markets.

With 70% of investors that we surveyed saying the world feels unstable and they’re worried about their finances, many investors appear to be lost – indeed, almost a quarter (23%) of those surveyed say they don’t know what to do. What would you say to convince investors to stay invested?

I always laugh when I'm watching CNBC or Bloomberg and they say it's so unpredictable today. It's unpredictable every day. We don't know what's going to happen in the future. First and foremost, people have to realise that unpredictability is just part of the environment. There are different things that cause this unpredictability. There are wars, there's energy policy, there's interest rate policy, there's natural disasters, there's pandemics, there's trade war. We are constantly in a period of flux and uncertainty.

How do we deal with this as investors? When we address this with our clients, we say think like an investor and not like a trader. What is the difference between the two? A trader is trying to guess price movements and then play what their anticipated belief is on that price movement. For a trader, volatility is the enemy. So, they're trying to play a short-term trend.

On the other hand, an investor steps back and identifies an undervalued asset and invests for the long term. When we invest in businesses, we're investing in assets that have long time horizons. We're not viewing our investments as trades. We're viewing them as long-term investments.

To me there are four keys to convince investors to stay invested. Number one, think for the long term – think as an investor and not as a trader. In this way instead of being jerked around by volatility and uncertainty, investors have the potential to profit from it. The short-term price movement gives an investor an opportunity to position him or herself for longer-term outperformance. 

Number two, stay diversified. For the past ten years, ending December 2024 in equity markets, it didn't pay to be diversified. You just put your money in the US market, specifically the Magnificent 7 stocks, and it all worked. In the 1980s, similarly, you put your money in Japanese stocks and it all worked.

But it works until it doesn't. And historically, the longer it takes for the fundamentals to assert themselves, the bigger the adjustment back will be. What we've seen as an example in the past ten years in global equity markets is an unsustainable interest in US equities. US stocks account for over 70% of global equity indices.

In essence, being underweight US was a losing proposition. Global equity ex US performed around 5% for those ten years, and the US did about 13%, so around 800 basis points per year over ten years. Now the S&P 500 is near flat this year and international indices are up almost 20%. So, historically speaking, it pays to be diversified. It might work over the short and even the medium-term, but eventually prices and value catch up.

Number three, macro environments are exogenous. There's nothing you could do about this. To go back to point one: think long term and take advantage of this. Investors have to realise to separate what they can do, what they can't impact, and not to fret over what is exogenous, what is given to them, but to try to take advantage of the situation.

And number four, you can’t ignore the price of assets – especially if you're an investor. If you're a trader, who cares about the price? All you care about is movement. In our view, the value of any asset is a present value of its future cash flow streams.

Even though something might look persistently underpriced, if the cash flow stream keeps going up, we think it often makes sense, to stay involved because, again, eventually fundamentals do assert themselves. Don’t play every price movement, look at the price of assets. Try to take advantage of not where the money was, but where the money will be going. A core investing belief of ours is that money will flow ultimately to where cash flow yield is.

The price of the asset is determined by cash flow streams, whether we're talking about a stock or a bond, or a property. And the price is ultimately determined by the rental stream, the net income stream, the interest stream, whatever it is. When we get hooked up to the trader mentality, we often just are blinded by movement and not by underlying intrinsic value.

Has your view of international equities changed since the Trump tariffs have come into effect?  Do you see it as being a boon for flows into European equities in particular?

For Europe, which has been abandoned by global investors, tariffs have been a wake-up call to become more self-sufficient, whether it be defence, whether it be monetary policy, whether it be the bond market. The tariff announcements gave impetus to European policymakers to react.

The German election was another strand of evidence that business as usual in Europe really is not a winning strategy. They need to take a different tack. And I think we do see this slowly happening. I believe European assets, which have been ignored for the better part of a decade or two, will finally go up.

When you look at the valuation differentials that exist between European stocks and US stocks, we think there's still plenty more room for improvement. Don't forget the dollar has been on a huge bull run since 2014, which to me proves unsustainable ultimately. Because the dollar went from being measurably undervalued in 2014 to being measurably overvalued here in 2025, eleven years later.

While the S&P 500 continued to set new records in 2024, worries about the strength of the AI trade combined with Trump’s tariffs tantrum has led many to question their exposure to US stocks in the belief that the path forward for US equities will likely be filled with more volatility and greater dispersion. Would you go as far to say then that the era of US exceptionalism is over, and that we could potentially see an era of European exceptionalism?

I think the US exceptionalism in terms of the world flocking to the US equity market is over. And the speed at which the US or the European policy makers will accelerate some of the things they seem to be initiating will determine whether you do have a massive wave of money back into Europe.

But in the meantime, it's not going to take a massive wave to move share prices because there's so little interest in it. If a big wave ever comes, you might even have the circumstance where European stocks become overvalued. But we're nowhere near that today.

People realise they had all their chips in one area and that area was becoming very expensive and very crowded. Companies based in Europe are European companies – but they're global businesses as well – just like the big US companies.

Beyond Europe, are there any other geographic areas that you are seeing as an opportunity at the moment?

We keep waiting for Japan. At Harris | Oakmark we are still underexposed to Japan. We see improved capital allocation by Corporate Japan, but we do not see drastic improvement of operating margins. We're waiting for better corporate performance, but until then it's hard to find value in Japan.

There are other places to look at in the emerging world, in Korea, for instance. And in China we do think there are select opportunities, especially in the tech sector. We have exposure to both Tencent and Alibaba, which we think are two world-class tech companies.

Even as inflation nears central bank targets, few think it’s truly under control. Globally, just 41% of investors think elevated inflation is finally in the rearview mirror. How are the companies you are invested in thinking about inflation? Are you seeing a reaction from management teams?

I think for the most part the inflation fear has definitely been stabilized. We had artificially low prices post the Global Financial Crisis as a result of banks and consumers needing to rebuild balance sheets. We had extremely artificially low interest rates. And then of course you had the pandemic, and then way too much fiscal and monetary stimulus.

Now, we see all this reversing. The central banks tightened up, so the monetary stimulus is gone. Of course, there's still too much fiscal stimulus. Now, I don't think we're going to have deflation, but I do think despite the fiscal irresponsibility of the global governments, especially the US, I do think we will have disinflation.

The tariffs, of course, might become inflationary for the US, but for the rest of the world there should be less inflation pressures and there should be the ability of the central banks to lower interest rates more. With the deflation that we're seeing in China and the deflationary pressures that AI will present to the economy, I think you will start to see more disinflation, lower inflation levels, which will allow central banks to be more accommodating from a monetary policy perspective.

Do you believe tariffs will end up turning into a full-blown trade war?

I think a full-blown trade war makes too many losers and is too irrational. I don't believe there will be a full-blown trade war. I do think there will be less trade freedom than we've had in the past.

What are your thoughts when we learn that 43% of investors are concerned about the potential for economic collapse, while another 41% are worried about prospects of a market crash?

I would say they're not thinking ahead. They're thinking about what's happening today and they're expressing their view of what's happening today. 

Compared to 10, even 40 years ago, information trades instantaneously. Money moves instantaneously. We have big pools of trading capital whereas 30 years ago the big pools of money weren't trading capital, they were long-only defined benefit pension plans.  Now you have these big pools of trading capital that use leverage, that use algorithms, that use factor trading, which means we have more volatility, more big price swings.

I would argue that, as an investor, you have more opportunities because you have more imperfect price discovery. But you have the proper time horizon to take advantage of this. And if you don't have the proper time horizon, you're just going to get whipped around like a windsock.

You have to remember the simple fact that the time horizon the assets in which we're investing in is very long term. The valuation movement of these businesses is very gradual. But the price movement could be very aggressive. And that price difference provides opportunity.

Written in June 2025