Animal Spirits Podcast Summary
Episode: "Talk Your Book: International Stocks, So Hot Right Now"
Release Date: April 7, 2025
Host: Michael Batnick and Ben Carlson
Guest: Raul Sharma, Portfolio Manager and Executive Director at Schaefer Cullen Capital Management
Introduction
In this engaging episode of the Animal Spirits Podcast, hosts Michael Batnick and Ben Carlson delve into the renewed interest in international stocks. Joined by Raul Sharma, a seasoned portfolio manager with over two decades of experience in managing emerging and international market strategies, the conversation navigates the shifting landscape of global investing, exploring the factors fueling the resurgence of non-US equities and the strategies investors can employ to capitalize on these opportunities.
The Resurgence of International Stocks
Michael Batnick kicks off the discussion by highlighting the current buzz around international stocks:
"International stocks are so hot right now. People are trying to figure out, is this real? Does this actually have legs, or is this just another head fake?"
[00:51]
Raul Sharma acknowledges the long period of underperformance relative to US benchmarks, noting it's been a challenging time for international investments:
"...it's been a long, painful period of underperformance."
[02:17]
The hosts explore whether the recent rally is sustainable or merely a transient phenomenon. Ben Carlson responds by pointing to significant catalysts that have emerged, which may underpin this positive shift:
"...President Trump's policies are forcing some of these countries to do things that they really frankly should have done a long time ago."
[04:01]
Catalysts Driving International Market Growth
Several key factors contribute to the renewed interest in international and emerging markets:
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Increased Defense and Infrastructure Spending: Ben Carlson emphasizes the impact of European countries, especially Germany, ramping up defense expenditures in response to global geopolitical shifts:
"They're talking about defense spending, big increases in defense spending... there's a lot of needs for that."
[04:40] -
Consolidation in European Financial Sectors: Ben Carlson highlights consolidation efforts in European banks, mirroring successful deleveraging strategies seen in the US:
"We're seeing consolidation in certain European markets, particularly in the financial sector... that's a really good thing for industries that consolidate."
[06:00] -
Potential End of the Russia-Ukraine War: Ben Carlson discusses the positive implications if the war concludes, including reduced risk premiums and increased reconstruction activities:
"You will see the risk premium on European stocks go down... there's a lot of reconstruction activity."
[06:18] -
Lower Valuations and Higher Yields: International and emerging market stocks present attractive valuations compared to US counterparts, coupled with higher dividend yields:
"These companies were quite cheap... valuations and the potential for that [earnings growth]."
[06:51]
Investment Strategies: Mutual Funds vs. ETFs
The conversation shifts to how investors can access these international opportunities effectively:
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Mutual Funds and Separately Managed Accounts (SMAs): Ben Carlson advocates for mutual funds and SMAs over ETFs, citing the flexibility and active management benefits:
"Active makes a lot of sense... ETFs, they have to wait to rebalance and they're stuck holding those positions."
[20:37] -
Advantages of Active Management: Ben Carlson explains how active management allows for strategic adjustments during volatile periods, something passive ETFs struggle with:
"We were able to actively navigate through that environment by getting into companies... whereas the passive approaches could not do that."
[21:20]
Currency Considerations and the Dollar's Impact
A significant theme is the role of currency fluctuations, particularly the US dollar's strength:
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Weakening Dollar as a Tailwind: Ben Carlson highlights how a declining dollar historically benefits non-US equities, enhancing returns for US investors:
"A declining dollar is the best thing for those stocks... it has a 90% hit rate almost all the time."
[12:42] -
Currency Diversification: The hosts discuss strategies for managing currency exposure, noting the challenges and benefits:
"They’re going to have to hedge their currencies, which is costly... but I think you want that foreign currency exposure."
[27:33]
Addressing Investor Sentiment and Opportunities
The podcast addresses the pervasive negative sentiment towards international stocks and how it creates investment opportunities:
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"Throwing the Baby Out with the Bathwater": Ben Carlson likens the broad dismissal of international markets to discarding valuable opportunities:
"You're absolutely correct in that... that creates a lot of opportunities."
[17:59] -
Mean Reversion Potential: Ben Carlson underscores the significant room for mean reversion, given international stocks are currently underweighted compared to historical averages:
"The weight of the index is only about 30% versus a long term average of over 45%."
[07:00]
Practical Guidance for Investors
Ben Carlson offers actionable advice for investors considering international and emerging market investments:
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Valuation and Dividend Focus: Emphasizing value and dividends, Ben Carlson explains how international multinationals offer cheaper valuations with attractive yields:
"Compare some of these global multinationals from say Europe or Japan to US peers... it's about 25% cheaper with literally double the yield."
[16:05] -
Accessing International Markets Efficiently: Encouraging the use of mutual funds and SMAs, Ben Carlson details the logistical benefits over direct stock purchases or hedged ETFs:
"The funds are a really good vehicle in emerging markets... another advantage is that we could reclaim withhold taxes on the dividends for all the investors."
[19:47]
Conclusion
The episode concludes with Ben Carlson reinforcing the strategic advantages of investing in international and emerging market stocks through active management platforms like Schaefer Cullen Capital Management. He encourages listeners to explore their offerings for diversified, high-dividend strategies that capitalize on the current favorable conditions in global markets:
"I would suggest our website... it's www.schaefer-cullen.com."
[29:43]
Michael Batnick wraps up by directing listeners to Cullenfunds.com for more information, ensuring that interested investors have clear pathways to engage with the strategies discussed.
This episode provides a comprehensive overview of the factors contributing to the renewed attractiveness of international stocks, practical investment strategies, and the nuanced considerations around currency exposure. Whether you're a seasoned investor or new to global markets, the insights shared by Michael, Ben, and Raul offer valuable guidance for navigating the evolving landscape of international investing.