Sarah Ketterer on Value Investing Beyond the US: Europe, Japan, and South Korea

US Market Performance and Value Investing

• 💡 The US equity market's strong performance since recent events is attributed to abundant credit and a significant amount of money seeking investment opportunities.
• 🎯 While the US market has recovered, Causeway Capital Management, with over $55 billion in AUM, emphasizes a greater emphasis outside the US in their global equity portfolios, underweighting the US market.
• 🔑 Value investing is becoming more attractive in a normal interest rate environment, where underestimated earning potential and capital returns are highly valued.

The Impact of Interest Rates on Investment Strategy

• 📈 A stock's worth is the present value of its future cash flows; near-zero interest rates make investors willing to pay any price for future earnings, favoring speculative growth.
• ⚠️ Rising real interest rates increase the cost of money, making value investing more compelling as investors demand a risk-free rate above inflation and discount future cash flows more heavily.
• 📊 The US market's growth premium over Europe in the last decade was driven by greater sales growth and, significantly, multiple appreciation, fueled by fiscal stimulus.

Shifting Investment Landscape: Europe and Japan

• 🇪🇺 Europe presents opportunities due to increased defense spending, infrastructure needs, and the push for a harmonized EU capital market, potentially narrowing the valuation gap with the US.
• 🚀 Companies like Alstom, a leader in rail equipment and services, are highlighted as examples of European investment potential, benefiting from urbanization and public transport improvements.
• 🤖 Automation, particularly in Japan with companies like Fanuc and SMC, is seen as crucial for productivity and output, especially in response to aging populations and demographic challenges.

Japanese Market Opportunities and Value Traps

• 🇯🇵 Japanese companies like Murata (ceramic capacitors) and Fanuc (robotics) are identified as world champions trading at cyclical lows, offering significant upside potential.
• 🔍 Causeway Capital focuses on finding great companies at cyclical lows, prepared to hold them through market downturns for substantial returns when the cycle turns.
• 💡 The demand for memory semiconductors, driven by increasing compute needs and AI, presents an opportunity in companies like Samsung Electronics, despite short-term cyclical downturns.

UK Market and Emerging Opportunities

• 🇬🇧 The UK market offers value, particularly in companies undergoing operational restructuring, exemplified by Rolls-Royce's transformation into a cash flow-generating duopoly.
• ✈️ Travel-related businesses like WH Smith and Carnival Cruise Lines are attractive due to the resilience of travel spending and captive customer bases, despite competition.
• 📈 Emerging markets, particularly Asia and South Korea, show promise, with Samsung Electronics being a key example of an undervalued leader in a critical sector.

Investment Philosophy and Risk Management

• 💰 Causeway Capital employs a risk-adjusted return basis to rank stocks, considering both potential price targets and the incremental volatility a stock adds to a portfolio.
• 📊 The firm invests in companies with strong fundamentals, competitive positioning, and the ability to return capital to shareholders, prioritizing those with excellent management teams and clear operational turnarounds.
• ⚙️ For smaller companies, a minimum market cap of $1 billion is preferred, with a comfort level around $3 billion and higher, requiring high certainty in management's ability to execute turnarounds.

Alternative Assets and Future Outlook

• ₿ While owning some Bitcoin due to its exciting future involving blockchain, the preference is for assets with earnings and cash flow, making gold less appealing despite its current strength.
• 🎧 Current learning is focused on podcasts, including those on AI models and technological advancements, alongside reading books to understand different political perspectives.