David Herro on International Investing: Dollar Weakness, Valuations, and Opportunities

International Investing Tailwinds

• ⚡ Dollar weakness is acting as a tailwind for international investing, with ETFs tracking France, Germany, and Japan hitting records.
• 📈 The DXY has fallen from a high of 105-110 to around 95-96, reversing some of the strong dollar's impact that previously hurt international equities.

Valuation Disconnects and Opportunities

• 📊 Historically, foreign stocks traded at a 14-15% discount to US stocks; today, this discount is closer to 25-30%, indicating undervalued stocks and currencies.
• 💡 This valuation gap, combined with improving earnings growth in foreign markets, suggests significant room for revaluation in both currencies and equity markets.
• 🌍 Global companies, even those located in regions perceived as slow-growth like Europe, offer great opportunities due to their worldwide business operations and attractive free cash flow yields.

Sector and Geographic Opportunities

• 💊 Strong sectors outside the US include pharmaceuticals, with companies like AstraZeneca and Roartis in Switzerland and the UK trading at good values.
• 🛍️ Consumer discretionary and staples, particularly companies like Danone and Unilever, are also attractively priced.
• 💎 Luxury goods companies like Louis Vuitton and Kering, despite recent weakness in the Chinese consumer market, are presenting rare valuation opportunities.

Japan's Valuation Concerns

• 📉 While Japan's market has derated significantly from its 1989 peak, value investors find it unattractive due to low average returns on equity (8-9%) and thin margins compared to US (20%+) and European (high teens) companies.
• 🧐 Even with a lower price-to-earnings ratio, the quality of Japanese businesses, exemplified by companies like Kao with 9-10% margins versus P&G's mid-20s, makes the risk-return profile unfavorable for value investors.