7 International Investing Insights from David Herro
How is the recovery playing out globally?
On the other hand, there are still some lingering fears of Covid-19, its new variants, and the possibility of new lockdown measures. We are seeing a little bit of this in Asia, which is kind of restraining interest rates and combined yield. So you do have this interesting push-pull. That said, we are seeing many companies with robust business activity. Thankfully, the global economy did not switch on all at once, because the global economy is having trouble handling a phased reopening. You still have places in Asia that are not fully reopened. Even other places around the globe, like Australia and New Zealand, are sporadically pushing pause to deal with outbreaks.
Overall, what we are seeing in the companies we follow are conditions of strong demand, strong profitability. In fact, in select industries like the automobile sector, they cannot satisfy demand because of parts shortages and the strong demand. I think what you'll see is this demand will remain for some time.
What is your outlook on banks?
Look at ROE (return on equity), the returns of the net income over the equity base. If the equity base has to grow because of regulatory reasons, that compresses the ROE. And the fact is, they have still been able, as a group, to grow earnings. Since the capital build has grown faster, this has had a depressive effect on the return structure of businesses. But I guess the positive to this is greater safety. They have more capital. They have the greater ability to absorb losses.
Another headwind has been low to no interest rates. Lending is a spread business. When you get really, really low rates, that impacts spreads over time. So companies have been hit with lower interest rates and spreads. What they've done is try to enhance earnings from other areas in financial services – whether it be asset management or consumer credit. This is one of the reasons why many of these companies, despite all of those headwinds, have been able to grow income.
Is there still value in European financials?
Therefore, when you consider where interest rates are, and where the nominal yield of these financial institutions are today, we think there is a very good value case to be made.
Could fintech firms dent earnings of banks?
However, there is always competitive pressure out there for any business and these banks are not immune to it, from either smaller or bigger rivals. Overall, we believe that we are investing with companies that are embracing fintech and will strive to stay ahead of competitors.
Does a global corporate minimal tax rate that the US Treasury and Biden are pushing with other nations make sense?
Frequently around the globe, there is a very, very large difference between tax rates and effective tax rates. Meaning there are all kinds of adjustments because of such things as R&D credits and investment credits. Therefore, until one sees the details, it's really, really hard to figure out how it will impact the companies in which we're invested.
How are you viewing China’s regulatory action on their tech firms?
There is a host of regulatory issues that are unclear right now. One of the things we've tried to do when investing in China is kind of stay away from industries that are undergoing significant regulatory change. Certainly internet companies at the periphery have seen some impact here over the last few months. Overall, we will continue to look at many names in China because tech is a rather important sector. But we have to find the right company with the right governance.
How about the Japanese government stepping in on corporate matters?
This material is provided for informational purposes only and should not be construed as investment advice. All investing involves risk, including the risk of loss. The views and opinions expressed are as of July 12, 2021 and may change based on market and other conditions. There can be no assurance that developments will transpire as forecasted. Past performance is no guarantee of future results.
Investing in value stocks presents the risk that value stocks may fall out of favor with investors and underperform growth stocks during given periods.
Return on equity (ROE) measures a corporation's profitability in relation to stockholders’ equity.
American depositary receipt (ADR) is a certificate issued by a US depositary bank representing a specified number of shares of a foreign company’s stock. It is effectively a way for US investors to buy stakes in foreign companies.
Sustainable investing focuses on investments in companies that relate to certain sustainable development themes and demonstrate adherence to environmental, social and governance (ESG) practices; therefore the Fund’s universe of investments may be reduced. It may sell a security when it could be disadvantageous to do so or forgo opportunities in certain companies, industries, sectors or countries. This could have a negative impact on performance depending on whether such investments are in or out of favor.
A bond's nominal yield, depicted as a percentage, is calculated by dividing all the annual interest payments by the face, or par, value of the bond.
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