World Markets Review
Many investors are understandably concerned about investing in European companies today. Capital Group portfolio manager Rob Lovelace offers an alternative view.
Matt Miller: U.S. stocks have outpaced European stocks in recent years. What’s the right way to think about that? There was one financial advisor at an event we had recently who basically was saying, “How do I tell my clients to even stay in European stocks at all?” What would be your answer?
Rob Lovelace: One of the, I was going to say, fun things about being in the business for more than 30 years is I’ve lived through a few cycles where the U.S. has been the predominantly best market. I’ve also lived through periods where it hasn’t. And it’s interesting to watch how, it seems to be, at about five or six years, people start to throw in the towel and just say, “Look, I don’t know that I can keep recommending, in this case, non-U.S. investments anymore because the U.S. has done so much better over this period of time, combined with the strong U.S. dollar.”
So I would say to an investor right now, don’t be locked in to geography. There are great companies based all over the world. Why would you want to create an artificial filter that says, “I only want to invest in those that are domiciled in the U.S.”? So while the U.S. stock market, in aggregate, has done better, there have been great investments outside the U.S. If you think of the auto industry, probably one of the better examples of “would I really want to limit myself only to U.S.-domiciled auto companies?” wouldn’t I want to be able to invest in auto companies that are making great cars — by the way, I might be buying here in the U.S. — but are not actually officially considered a U.S. auto company? Right?
We have always had a philosophy at Capital that we want to find the best companies wherever they’re based.
Matt Miller: If there’s a resistance or a worry about Europe after a certain amount of years because the valuations seem to be lower than in the U.S., does some of this have to do with just a short-term versus a long-term outlook?
Rob Lovelace: There are structural issues in Europe that I think Americans, in particular, pick up on. And they’re valid. Growth rates in Europe have been more muted for a long period of time, and people look at that and they hear about the potential election issues in Europe. There are a lot of reasons to be nervous about the European situation. But if you’d look at the individual companies, what you begin to realize very quickly — and we did some work on [The] New Geography [of Investing®] that pointed this out — more than 50% of the revenue of European-domiciled companies comes from outside of Europe.
The companies have identified some of these structural issues as well. The drug companies, the consumer products companies, the automobile companies, even some of the internet companies have found better markets in Asia; in China, in particular; in the United States. So when you’re investing in European companies, it’s actually very hard to get true exposure to the European economy. When you’re investing in European companies, you’re investing in champion exporters. You’re investing in champion companies working on a global basis. Unless you go very far down the market-cap scale, you’re not really invested in Europe per se. And I think this is one of the challenges to asset allocators these days, is that even if you’re investing in the U.S., you’re getting quite a bit of revenue exposure outside of this country.
Matt Miller: What’s so interesting about that is that if there’s a negative halo around Europe, where we’re taking a bottom-up approach, it just might mean that there are more opportunities, because values might be depressed because of a general bad mood about Europe, even though these companies are thriving and they’re really plugged into the global economy in terms of where their actual sales and profits are coming from.
Rob Lovelace: Exactly. There’s a major pharmaceutical company, actually a mid-sized pharmaceutical company, focused on the blood sector, based in Spain — world-class company — but as the European crisis played out, it got hit very hard compared to its Australian and U.S. competitors. It’s kind of an oligopoly. We looked at it as a great opportunity because, as you can imagine, working in that business, Spain is a very small market for them — and even the rest of Europe is a very small market for them. They do business all around the world because plasma is a really important commodity for everyone everywhere.
Matt Miller: And that becomes an opportunity.
Rob Lovelace: Exactly.
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