Why International and Why Now?

Why International and Why Now?

Elle Wu: I’m Elle Wu, a client portfolio manager here at Thornburg Investment Management. I’m here today with Emily Leveille, co-PM of the International Growth Strategy. We’ll be talking today about “why international” Hi, Emily. Thank you for coming. So we’ve been hearing a lot about why International for a few years now. I wanted to ask you what is different about things this time around?

Emily Leveille: Thanks. Well, thanks for having me. Five reasons, really, that we see right now. The first is we think the US dollar has peaked. The second reason is energy prices. They’ve come down pretty significantly year-over-year since the Ukraine crisis. Last year. The third, the reopening of China. Fourth reason valuations are more attractive. And the fifth reason is that the market is fundamentally more diversified than markets that we find in the United States.

Elle Wu: I would love to dive a little bit deeper into each of those reasons.

Emily Leveille: Sure.

Elle Wu: So, what gives you confidence that the dollar is either weakening or stabilized from here?

Emily Leveille: Yeah. I mean, look, a couple of things that we can point to are inflation really seems to have peaked in the US. It may stay higher for a longer period of time, but you’re seeing inflation prints coming down in the US and globally. And that’s really important for the interest rate differential between the Federal Reserve, which was sort of first and more aggressive to hike among the major economies.

And now those efforts are being followed by the likes of particularly the ECB. And so, we should start to see that interest rate differential narrow, which means that money can flow out, the US dollar and into particularly into the euro zone which is sort of what we’ve been seeing so far. The second thing is, you know, geopolitical shocks have diminished. So, when we had the Ukraine crisis in February of last year, the beginning of that, we saw a huge spike in the dollar as people fled away from risky assets. The Ukraine crisis is by no means resolved, but incrementally, we are seeing a normalization of the demand for risky assets globally.

The third thing I guess I mentioned already is the ECB has started to hike more aggressively. That should support the euro relative to the dollar. And those are really the main things. And we think a weaker US dollar typically supports international assets.

Elle Wu: So the second reason you mentioned was lower energy prices. Can you speak more to that?

Emily Leveille: Sure. So most major international economies, including Japan, China and mainland Europe, are net energy importers. So, the spike in energy prices last year had a pretty significant inflationary effect on those economies. And there was a lot of concern, particularly in the European continent, around worst-case scenarios of rationing and things like that when the winter came around because they were effectively cut off from gas supplies from Russia.

That has turned out those worst-case scenarios have turned out not to play out, which is a net positive for Europe, but also as energy prices have come down, that’s also beneficial to China and Japan and other net energy importers.

Elle Wu: The third thing you mentioned was China reopening. That’s definitely happened faster and quicker than expected. What are the ripple effects into the other economies?

Emily Leveille: The reopening of China has been faster than we anticipated after three years of zero-COVID policy. China has effectively reopened its economy. We’re not exactly sure what the implications are going to be in their totality. China is still having to suffer from waves of COVID that they delayed for three years. And so there are still likely to be some disruptions.

But we think this could be very positive for companies that are exposed to the Chinese consumer. We estimate that the Chinese consumer may have saved an incremental three to 5 trillion renminby during this time, which is really significant. So companies that are either exposed domestically to Chinese consumption or like a lot of European companies that either have exposure within China or benefit from Chinese tourists coming to Europe and buying their products should be benefited in the next six to 18 months.

Elle Wu: So, the last point you mentioned was that the markets are more diversified internationally, and I would love to hear more about that.

Emily Leveille: You know, it’s one of the things that gets us really excited as stock pickers and active managers. If you look at what has driven performance in the United States in the last 10 to 15 years, it’s really been this very select few mega cap tech companies that made up at one point up to 40% of the index in the United States, whereas if you compare that to the European Index and to emerging market indices, tech is a much smaller percentage of those indices. So I think in emerging markets it’s close to 20%.

And in our index—in the ACWI ex-US growth index—it’s close to 7%. So, it allows us to build a portfolio that has much more diversified sources of growth. And that’s really exciting as a stock picker.

Elle Wu: Thank you so much for your time today, Emily.

Emily Leveille: Thanks for your interest.

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