Portfolio Managers Brian Burrell and Joe Salmond argue that the quality, prospects and valuations of a company matter, not where they’re headquartered.
Observations in International Equities: Companies, Not Countries
Craig Blessing: At Thornburg, we follow a bottom-up high conviction approach to managing international equity. That’s been a good approach for the last couple of years. As individual stock selection and not country or sector allocation has led the performance of most of our strategies. 2023 was a good year, but as we look forward into 2024, there are still attractive opportunities out there. And how do those opportunities make the case that investors should broaden their horizons beyond the U.S.? Joining me today are Brian Burrell and Joe Salmond. So, Europe is the largest regional equity market outside the US, and it’s a place where over the last few years we’ve been finding a lot of opportunities in companies that are global leaders at attractive valuations.
The European equity market has actually outperformed the S&P 500 since its October ‘22 lows. Yet investor sentiment around Europe remains particularly weak, and European equities trade at a 39% valuation discount to the U.S., which is the most we’ve seen in over 20 years. Do you think investors should care more about the quality prospects and valuations of the companies they’re investing in or where the headquarters are located?
Brian Burrell: It’s a great question, Craig, and I think us as bottom-up generalist investors, you know, we start with the quality of the companies we’re investing in companies that countries, but we take a step back and look at the backdrop of European valuations versus their history versus other markets. It’s a positive set up. So, the spread between the S&P 500 and the European stock market valuations is quite wide now.
Now, that’s a great starting point, but it really doesn’t play out for a number of years. It’s more of a ten-year horizon where returns would look a lot better from a European context. So, us as bottom-up investors with concentrated portfolios. We’re looking for individual companies that are benefiting from some of these promising global trends, but which are not valued as such.
So, we’ve all heard about all the hype on artificial intelligence, AI. It’s been the hot theme lately, right? And there’s a lot of math going on, trying to decipher how many chips are going to be sold. But what is less written about, I think, is all the power that is needed to be generated to power these data centers and so on.
So, if you take one step further in your analysis of AI, you look at the needs of power. That means data centers. That means electrification. And it’s simple. It’s not as sexy as AI, but you need switches, you need cables, you need efficiency enhancing companies that are actually making those data centers able to put out a lot of power for AI.
So, if you look over to Europe, you have a number of companies, Schneider Electric would be one, where they’re actually producing the guts of those data centers. You have companies like ABB over in Switzerland where, you know, they’re creating the transmission grids in those cables that are necessary to get that power where it’s being generated to where it’s actually being consumed.
So, you know, I think us as global generalists, we’re starting with a very positive low valuation backdrop, finding really attractive companies that are benefiting from these trends, but which actually have really low valuations relative to some of the more thematic plays.
Joe Salmond: And I think just to add to that is Europe tends to be a home to really great global companies’ kind of by default. You’ll find a lot of amazing global brands that that aren’t European companies, but they get discounted as if they were tied to the European economy. An example would be Danone, which is maybe a little less glamorous than I think they make yogurts, waters, infant nutrition for the world. A percent of their revenue comes from France, but they get valued as a French company when they’re every bit as competitive with a US-based company, for example. So those are the kind of opportunities that are really exciting to find a discount.
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