David Eiswert
David Eiswert, vice president of T. Rowe Price Group, Baltimore, and manager of the T. Rowe Price Global Stock Fund (PRGSX). TRowePrice.com
For more than a decade, investors have looked at foreign stocks and thought, What’s the point? And in fact, it has paid to be a homebody. US stocks have beaten their overseas counterparts in eight of the past 10 years, returning an annualized 13% over that period versus 5% for foreign stocks.
But a Bottom Line Personal panel of all-star, stock-fund managers and investment experts say the tide finally could be shifting. Over the past year (through July 31, 2023), the MSCI EAFE Index of developed nations has outpaced the S&P 500 as the Japanese Nikkei Index soared to a 33-year high, and Europe performed better than expected. Even Warren Buffett made headlines recently by investing tens of billions of dollars overseas.
Our esteemed panel—David Eiswert (T. Rowe Price)…Simon Fennell (William Blair)…Randy Pearce, CFA, (Grandeur Peak)…Michael Manelli, CFA (Oakmark) and Thomas Shrager and Robert Wyckoff (Tweedy, Browne)—believe that investors will need to look abroad in the coming years if they hope to enrich their portfolios while keeping volatility in check. Foreign markets offer a wide spectrum of opportunities that tap into industries and growth trends not available or not as compelling as in the US. Plus, analysts estimate annualized returns for the next 10 years for foreign developed markets will range from 7.2% to 9.2%…emerging markets, 7% to 9%…and US stocks, just 5% to 6.7%.
Here are five tailwinds our panelists conclude are likely to lift foreign stocks to a leadership position over the next decade…
Bargain valuations. The US stock market looks overvalued and top heavy with low dividend yields. Stocks in foreign developed countries and emerging markets now are 30% and 35% cheaper, respectively, than those in the S&P 500, and they have twice the dividend yield. Great Britain and the Eurozone nations are particularly inexpensive now.
New global era of elevated inflation and interest rates benefits “old-economy” sectors such as financial services and industrials, which are more prominent overseas. At the same time, the high-flying US technology sector may struggle as tech giants increasingly encroach on each other’s territory, battling for market share in artificial intelligence (AI) and online advertising. Tech companies constitute nearly 30% of the S&P 500 but only 9% of the value stock–oriented MSCI EAFE Index.
Less-than-almighty US dollar. The US dollar had a 20-year peak in September 2022 and has begun to weaken this year against other major currencies. A declining greenback means that capital appreciation from overseas stock investments is enhanced once they are translated back into US dollars.
Re-emerging markets. Despite a weaker-than-expected economic recovery in China, emerging-market stocks are poised for a prolonged upcycle after years of poor returns. What to watch for: India, now the world’s fifth-largest economy, has a digital economy still in its infancy with half its population of 1.4 billion still under the age of 25…Mexico is benefiting from “nearshoring” as US companies relocate operations closer to home to ensure safer global supply chains.
Diversification benefits still are valid. Over the past half-century, when US stocks returned less than 6%, foreign stocks have done better 96% of the time, according to a Blackrock asset-management study. When US stocks returned less than 4%, foreign stocks beat them 100% of the time.
In the next few pages, Bottom Line Personal’s panel of stock-fund managers reveal the most attractive areas of the market and companies for aggressive and conservative investors. If you are confused about how much of your stock portfolio should be allocated overseas, Jeff DeMaso, CFA, shows you the steps to figure it out on page 11. And if you would rather not invest in individual stocks, turn to page 12, where exchange-traded fund (ETF) specialist Neena Mishra, CFA, lists the best foreign ETFs.
For more aggressive investors…
David Eiswert from T. Rowe Price: Three investment themes that I like now…
Japan’s resurgence. The Nikkei 225 Index has jumped 30% so far this year thanks to investor optimism over shareholder-friendly corporate reforms…signs of improved economic growth and rising wages after decades of deflation…and low interest rates. In particular, Japan’s world-class pharmaceutical industry often is overlooked by Wall Street analysts. One Japanese stock my fund owns now…
Daiichi Sankyo (DSNKY), one of my top holdings, is the second-largest pharmaceutical firm in the country. It has $9 billion in annual revenues and is best known for drugs that fight cardiovascular disease. The company also has more than 35 products in its pipeline including a potential blockbuster platform designed to deliver chemotherapy drugs directly to tumors, an alternative to traditional chemotherapy. Recent share price: $31.04.
Luxury European consumer brands. These high-end companies remained resilient in the face of higher inflation because the ultra-wealthy continue to spend. Europe is a dominant global player, producing expensive branded goods with long lineages from designer clothes to sports cars. Two luxury stocks my fund owns…
Ferrari (RACE) engineers and manufactures some of the world’s most exclusive sports cars, synonymous with Italian design, Formula One racing and state-of-the-art technology. Last year, only about 13,200 Ferraris were produced with a base cost of $225,000 to $400,000. Gross profit margins exceed 50%. Ferrari’s first electric vehicle is slated for a 2025 launch. Recent share price: $320.39.
Prada (PRDSY). Based in Milan, a fashion capital of the world, the 110-year-old company produces leather goods, footwear and ready-to-wear apparel. Prada will benefit from Chinese demand for luxury goods, which has been rebounding strongly despite China’s slow post-pandemic recovery. Recent share price: $15.03.
Financial-services utilizing AI. Semiconductor and software firms have been the obvious beneficiaries of AI so far, but the technology will transform how financial institutions overseas transact money and data. One overseas financial-services stock my fund owns now…
The London Stock Exchange (LNSTY) makes the bulk of its revenues on listing fees from the nearly 2,000 companies that trade on the exchange. But it is poised to become a Bloomberg-like financial-data powerhouse, offering sophisticated research to global investors and institutions. Recently, the company signed a 10-year partnership with Microsoft to develop infrastructure for new analytic products and services. Recent share price: $27.38.
David Eiswert is a vice president of T. Rowe Price Group, Baltimore, and manager of the T. Rowe Price Global Stock Fund (PRGSX). TRowePrice.com
Simon Fennell from William Blair: Two investment themes I like now…
Cutting-edge automation. In the US, AI has captivated investor attention, but many foreign companies are focusing on other technologies that are revolutionizing manufacturing, mining, building construction and public safety. Two automation stocks my funds own now…
Keyence Corp. (KYCCF). The Japanese company is a world leader in factory automation systems including sensors, lasers and measuring systems, as well as safety products that allow robots and machines to work together. Recent share price: $453.85.
Hexagon (HXGBY). Headquartered in Sweden, the firm specializes in geospatial systems and solutions. Example: Its autonomous flying laser scanners capture and create precise 3-D measurements and images of skyscrapers, mines and other hard-to-access dangerous environments.
British consumer-services giants. Many British stocks remain under pressure this year with inflation recently above 8%, far higher than in the US. The Bank of England will likely need to keep raising interest rates this year to slow the economy. But that doesn’t dampen the outlook for multinational food-services or equipment-rental companies that are headquartered in the UK but derive most of their earnings overseas. Two British consumer service firms with global reach that my funds own now…
Ashtead Group (ASHTY) rents construction and industrial equipment ranging from bulldozers to forklifts to fencing. Its American division, known as Sunbelt Rentals, is a major player in the highly fragmented US market. Recent share price: $296.36.
Compass Group (CMPGY). The largest food-services contractor in the world operates in 40 countries, serving 15 million meals a day in locations such as office buildings, universities, major cultural venues and correctional facilities. It serves an expansive range of clients including tech giant Alphabet, the US military and the Guggenheim Museum. Recent share price: $26.07.
Simon Fennell is a partner at William Blair, the global financial-services and investment-management firm based in London, and co-manager of the William Blair International Growth Fund (WBIGX) and International Leaders Fund (WILNX). WilliamBlair.com
Randy Pearce from Grandeur Peak: An investment theme I like…
Small- and mid-sized companies overseas often get little or no Wall Street analyst coverage. Their valuations are 40% cheaper than those in the S&P 500. Investors think of smaller companies as subscale competitors to their larger peers, but in fact, they can dominate sizeable niche markets and offer seasoned management and solid profitability. Two smaller-company stocks my fund owns now…
B&M European Value Retail (BMRRY) is a cross between Dollar Tree and Target. The $7-billion company has about 700 stores in the UK and 100 in France offering bargain-priced, branded products from food and housewares to small electrical goods. While the concept of branded discount merchandise is common in the US, it is just starting to spread across Europe. Recent share price: $28.40.
Globant (GLOB). Companies around the world need to digitally transform themselves to be more competitive, grow revenue and reduce costs. Globant is a $7.5 billion Argentine IT services firm that helps businesses implement and integrate new technology such as cloud computing, web applications and AI into their existing systems. Clients have included Disney, Coca-Cola and American Express. Recent share price: $174.73.
Randy Pearce, CFA, is chief investment officer of Grandeur Peak Global Advisors, Salt Lake City, and lead manager of the Grandeur Peak International Stalwarts Fund (GISOX). GrandeurPeakGlobal.com
For more conservative investors…
Michael Manelli from Oakmark Funds: Two investment themes I like now…
Blue-chip European banks are selling at depressed valuations after a decade of near-zero interest rates hurt their profitability. Recent US bank failures spooked investors that European banks could face a wave of insolvency due to shaky loans and investments. Reality: European banks tend to be safer and more conservative than their US counterparts. The rapid rise in European interest rates should improve these banks’ profitability and dividend yields. A European blue-chip bank the Oakmark International Fund owns now…
BNP Paribas (BNPQY) is the largest publicly traded bank in France. With operations in about 80 countries, it plans to become a US-style full-service global investment bank. Last year, it completed the acquisition of Deutsche Bank’s global prime brokerage and electronic equities units. The stock recently yielded 6.35%. Recent share price: $33.04.
Rebound in global travel. International travel reached 80% of pre-pandemic levels in the first quarter of 2023. The return of Chinese tourists to destinations worldwide should top off a robust revival of global tourism. Two travel stocks the Oakmark International Fund owns now…
Amadeus IT Group (AMADY). Although not as well-known as its competitors—Expedia and Booking Holdings (formerly Priceline.com)—this Madrid-based travel-software specialist is the leading supplier of booking data to travel agencies and corporations around the world. It also provides specialized commercial software for airlines. Recent share price: $71.65.
Ryanair Holdings (RYAAY). The Irish airlines uses a no-frills business model for short-haul routes between secondary airports throughout Europe. Recent share price: $102.53.
Michael Manelli, CFA, is partner at Harris Associates, Chicago, and co-manager of Oakmark International Fund (OAKIX) and the Oakmark International Small Cap Fund (OAKEX). Oakmark.com
Thomas Shrager and Robert Wyckoff from Tweedy, Browne: Two investment themes that are characteristic of Tweedy, Browne’s International Value Fund (TBGVX) today…
Financial “Suburbans.” This is the nickname we have given to several of our long-term, core “better business” holdings and that we believe everyone should consider owning in a foreign equity portfolio. Like big sport utility vehicles, we view these businesses as relatively indestructible—they have lucrative brands…powerful long-term advantages over competitors…strong pricing power…and the ability to compound their value year after year. Two examples of financial Suburbans that our fund owns now and that may be appropriate for purchase if their share prices were to weaken…
Nestlé (NSRGY). The 157-year-old Swiss food and beverage manufacturer is the largest in the world by sales, spans 190 countries and has a vast product lineup that includes Nestlé, Nescafe, Gerber baby food, Häagen-Dazs, Perrier and Purina. Recent share price: $122.90.
Diageo (DEO) is a British producer of premium beers and spirits such as Johnnie Walker scotch and Smirnoff vodka, as well as majority owner of United Spirits, India’s largest alcoholic beverage company. Recent share price: $175.94.
While both Nestlé and Diageo trade at relatively full valuations today, we believe they continue to compound their underlying intrinsic values at attractive rates and warrant continued ownership. In fact, we would consider adding to these positions at lower valuations.
Precision “Ag.” Disruptive technology such as AI guidance systems and automated driver assistance is helping agriculture producers increase their crop yields with fewer employees and less water and fertilizer. Higher commodity prices have improved profits for farmers allowing them to upgrade farming equipment. A precision Ag stock our fund owns now…
CNH Industrial (CNHI). The UK-based maker of agricultural equipment under the Case and New Holland brands spun off its commercial vehicle and powertrain businesses last year in order to focus on AI-equipped tractors, harvesters and grain carts. Recent share price: $14.36.
