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CFA Society Chicago members convened at the University Club of Chicago on June 4,2024 to listen to a panel discussion on international investing.  Chris Vincent, CEO of the Society, welcomed the members and introduced the moderator and the two panelists, both of whom were in Chicago for an investment conference.

William (Bill) Fitzpatrick, CFA, the event’s moderator, is the lead portfolio manager for the Logan Concentrated Value (LCV), Logan Value, and Logan International equity strategies. Bill currently serves as Immediate Past Chair of the CFA Society Chicago’s Board of Directors.

Stuart Winchester, CFA, is a Hong Kong-based portfolio manager with Allianz Global Investors and a member of the Asia Pacific investment team. Stuart has managed the firm’s Unconstrained Total Return Asia Pacific strategy since 1994. He is also responsible for an Asia Pacific Small Cap mandate as well as Hong Kong mandates in global equity and balanced funds.

Richard de Chazal, CFA, is a Madrid-based macro analyst with William Blair.  He has over two decades of experience analyzing the U.S. economy and financial markets. Richard provides timely insights and commentary on the various high frequency economic indicators, actions of the Federal Reserve, and the financial markets. In addition, Richard provides cogent analysis of key macroeconomic topics and trends in his popular in-depth Economics Weekly reports.  

Vincent handed off to Bill Fitzpatrick, Immediate Past Chair of the CFA Society Chicago’s Board of Directors, to moderate the discussion.  Vincent invited the panelists and guests to ask Fitzpatrick questions, too, as the moderator was also an expert in the topic under discussion.

Fitzpatrick welcomed the panelists and offered his own opinion that now is a once-in-a-generation opportunity to own international (ex-U.S.) equities, noting the strong performance and lofty valuations of U.S. stocks vs. international stocks.  The first question to the panelists was meant to explore the reasons for this.  “Why is there a disconnect between US and international equities?” Fitzpatrick asked.   

Winchester cited two issues that contribute to the disconnect.  First, the strength of the U.S. dollar adversely affects Asian equities and emerging market equities more broadly. Second, while the U.S. economy remains robust, China faces challenges. The Chinese economy is currently in the doldrums, burdened by heavy debt and lacking a clear path to deleveraging. Consequently, regional demand—especially related to exports to China—remains subdued. Despite attractive equity valuations in many Asian markets, this weak demand is keeping a lid on overall  valuations in Asia.  

Winchester noted that India was an exception.  Valuations are not depressed, and Winchester believed the economy would continue to perform reasonably well.

De Chazal answered Fitzpatrick’s question by extolling the dynamism of the U.S. economy.  It is a powerful combination to be an innovative economy with artificial intelligence at the forefront today, but also one which is a net exporter of energy.  Pivoting to valuations, de Chazal explained that European stocks are trading at a 30% discount to U.S. equites today, compared to a typical 5% discount.  However, Europe is not a macro play, the macro strategist cautioned, but rather a stock-picker’s market.  

Winchester, adding to De Chazal’s remarks about European vs U.S. valuations, observed that Asia is trading cheaply, at 14x EPS.  He added that China is even cheaper than broad Asia, before offering his opinion on why China may be trading at relatively low multiples.   “China is a command economy, and you don’t make money (investing) in a command economy,” Winchester declared and further noted the difficulty in ascribing a reasonable political risk premium.  Winchester said that if he managed an equity portfolio against an index with a 5% or less weight in China, he would not bother investing there, given the difficulties and uncertainties.   Winchester then turned to the opportunities in the Chinese equity market, for those who choose to invest there.  First, counter to the previous strategy of owning entrepreneurial private companies and shunning state-owned companies, now it makes sense to be aligned with the state by investing in state owned enterprises.   A second opportunity is in healthcare.  China’s aging population will need access to world class healthcare, and Winchester highlighted the Pharmaceutical sector as a beneficiary of the demographic trends in the PRC.  He moved away from the topic of China by reiterating his caution, “I would not commit a large amount of capital there.”

Winchester pivoted to the Japanese equity market.  Previously, he noted, companies were managed for the benefit of society.  He sees a future where Japanese companies will be managed for the benefit of shareholders and anticipates a rising trend in return on invested capital for the market.  Valuation of the Japanese equities market is low compared to its own long-term history.  Finally, he opined that the Yen is significantly undervalued.

Fitzpatrick asked de Chazal about the business environment in Europe broadly, and specifically asked about the trend of UK-listed companies moving their primary equity listing to the U.S.  De Chazal commented that the UK business community has not acted meaningfully on the issue of relistings (editorial note: such as those by Ferguson and CRH).  He noted that relistings may not only be from the UK to the US.  TotalEnergies, the French integrated energy company, has broached the possibility of moving its listing to the U.S.   Addressing the upcoming UK elections, which coincidentally fall on the Fourth of July, de Chazal stated that neither the Tories nor Labour have been discussing substantive structural reforms to the UK economy.

The moderator switched the topic to inflation and interest rates, asking Winchester about his expectations for rates in the U.S.  Winchester cited two positives regarding the current level of inflation and interest rates.  First, investors could once again receive a return on their bond investments.  And second, the market has a more reasonable risk-free interest rate reference point these days.  With the strong economy chugging along, he does not see a reason why rates should have to fall.  De Chazal’s opinion was that it would be a big problem if the Federal Reserve raised interest rates.  Regarding the US economy, Winchester cited federal debt as the salient concern.  Sustained spending and deficits would make the U.S. Dollar vulnerable, he warned.  

Fitzpatrick asked de Chazal to comment on the European Central Banks’s next move.    De Chazal commented that the incremental policy rate move is more impactful in Europe than in the U.S., because European economy is more interest rate sensitive than the U.S. economy.  He went on to opine that the next ECB rate cut was already priced into the market.

The discussions turned to small cap stocks.  “Are there opportunities in that space?”, Fitzpatrick asked Winchester, whose initial response was that he just looks for good companies, regardless of market capitalization.  That said, Winchester observed that sell-side coverage of small-caps continues to fall, so there may be more undiscovered ideas in the small-cap group.  Winchester noted that Taiwan and Malaysia are two markets where he is seeing lots of good opportunities among small-cap stocks.

Fitzpatrick asked de Chazal to comment on political and geopolitical risks this year.  De Chazal emphasized there are lots of elections globally this year, and many are very important to monitor.  He noted that companies are delaying investment decisions until they have better clarity of the future in a very politically divided United States.  De Chazal noted that his French clients in particular feared a Trump victory in November.  

During the Q&A session, the first question directed at Winchester inquired where he sees innovation and dynamism in Japan.  Winchester cited three larger companies that remain dominant in their markets –  pharmaceutical company Daiichi Sankyo, semiconductor equipment manufacturer Tokyo Electron, and industrial automation leader Fanuc.  Additionally, he gave an example of a small-cap company he recently met that developed anti-scamming software for smartphones.  

Another audience member wanted to know which market the panelists would consider “under-the-radar” and presents attractive long-term potential.  Winchester responded with “Malaysia and Taiwan.”

Though the question queue was only ramping up, Fitzpatrick ended the event on time.  Winchester and de Chazal stayed behind to meet the Society members and address their questions.  There was talk of inviting this dynamic duo back next year if they happen to be in Chicago at the same time again in 2025.