Now Is the Time to Invest Outside the U.S., Managers Say. Heres What Theyre Buying. – Barron’s

Posted: September 20, 2020 at 10:50 pm


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Though valuations abroad look enticing, veteran global investors at Morningstars investment conference on Thursday said the case to look overseas goes well beyond valuations, highlighting some of the more innovative companies that make going abroad worthwhile.

Here are highlights of Morningstars discussion with Rob Lovelace, vice chairman of Capital Group; Artisan International Small-Mid fund (ticker: ARTJX) manager Rezo Kanovich; and Rupal Bhansali, chief investment officer of international and global equities at Ariel Investments.

Valuations abroad are cheaper than the U.S., but Lovelace mentioned a lot of that comes down to the composition of these markets. The U.S. is heavily tilted toward information technology, health care, and discretionaryhigher valuation and higher growth sectors, while Europe is heavier on financials, energy, and commoditiessectors where multiples have been low.

But Ariels Bhansali warned that price/earnings multiples in the U.S. are a head fake when the world is awash with debt. As companies load up on debt, the better metric is enterprise value to earnings before interest and taxesand on that basis the S&P 500 has already exceeded levels traded in 1999 and looks close to a bubble.

Market Data Center: EMEA and Asia

The other metric to watch carefully is free-cash-flow conversionand here international markets look better. Companies like Amazon.com (AMZN) or Tesla (TSLA) that have faster growth are capital-intensive and their free cash flow conversion isnt that great, Bhansali says.

While international companies may be slower growth, they may convert more of their earnings into free cash flow, she adds. And that is reflected in the higher dividend yield in international marketsone reason she is overweight international equities in the Ariel Global fund (AGLOX).

As U.S. companies have rushed to borrow in the months after the pandemic, Bhansali warns equity investors could be vulnerable to a possible deluge of downgrades and defaults. With rates at zero and no scope to go lower, servicing that debt could be problematic for companies. The notion that the Fed put will protect companies against all evils and sins is misguided, she says. They have said they would only buy the debt of solvent companies, not insolvent companies so its still a buyer beware marketplace.

Its one reason Bhansali sees opportunity in Japan, where companies and the economy have been whittling down debt for two decades.

The American Funds New World fund (NEWFX), which can invest in local companies in emerging markets and large developed multinationals that do a lot of business there, has lately been shifting toward those domiciled in emerging markets. Much of that is going into China amid an explosion in areas like biotech and software as people move back from the U.S. or Europe and set up innovative companies, Lovelace said.

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Artisans Kanovich hunts among smaller companies abroad and has been picking up companiesmany of which are self-fundedthat have become larger by being disrupters and playing in new industries. That includes the likes of British online fashion company Boohoo Group (BOO.UK), and Japanese enterprise software company Hennge KK (4475.Japan)

Many of these smaller companies are dominating in niche industries or taking advantage of their agility to fill gaps as industries go through major shifts, like Kornit Digital (KRNT), which enables direct-to-garment printing of color in ways similar to inkjet printing on paper that lets clothing manufacturers to custom build clothes in small batches. The company is facilitating a trend toward instant fashion, Kanovich says.

The technologies give shoppers quick personalized clothing and changes the economics for producers, making fashion brands much higher return on capital businesses. They collect customers money upfront, carry almost no inventory, and sell most of their merchandise at full price, Kanovich says.

Corrections & Amplifications:

Artisan International Small-Mid fund manager Rezo Kanovichs holdings include Boohoo Group and Hennge KK. An earlier version of this article incorrectly included Wuxi Biologics as a holding. Kornit Digital enables direct-to-garment printing of color in ways similar to inkjet printing on paper that lets clothing manufacturers to custom build clothes in small batches. The article identified the wrong company.

Write to Reshma Kapadia at reshma.kapadia@barrons.com

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Now Is the Time to Invest Outside the U.S., Managers Say. Heres What Theyre Buying. - Barron's

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September 20th, 2020 at 10:50 pm

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