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The Fiscal Shift That Means You Must Own Europe · Merryn Talks Money

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  Speaker 1: Bloomberg Audio Studios, Podcasts, radio News.
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  Speaker 2: Welcome to Merrin Talks Money, the podcast in which people
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  Speaker 2: who know the markets explain the markets.
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  Speaker 3: I'm merrin'sums at Web. Now.
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  Speaker 2: Things aren't quite as they were in the US. The
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  Speaker 2: spell of exceptionalism is broken, and everyone's looking around the
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  Speaker 2: little if not the US web does that there is
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  Speaker 2: value all over the place for those that care to
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  Speaker 2: look for it, perhaps in Japan, perhaps in Korea, and
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  Speaker 2: perhaps in Europe, which is picking up the fiscal stimulus
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  Speaker 2: bat and the US looks to be dropping. So to
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  Speaker 2: unpack all of this, I am joined by Sarah Catter,
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  Speaker 2: a chief executive officer of Causeway Capital Management. That's fifty
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  Speaker 2: five point two billion dollars in assets under management. She
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  Speaker 2: also serves as a portfolio manager for the firm's fundamental strategies.
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  Speaker 2: Sarah co found of Causeway Capital Management in two thousand
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  Speaker 2: and one and has decades of experience managing international and
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  Speaker 2: global value portfolios.
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  Speaker 3: Sarah, it is great to have you on. Thank you
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  Speaker 3: for having me, Maren.
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  Speaker 2: Now, we've got quite a lot to get through. Things
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  Speaker 2: seem to change every minute these days. It's hard to
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  Speaker 2: keep a handle on what's important and what's not important
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  Speaker 2: and where.
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  Speaker 3: Things might or might not go.
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  Speaker 2: So why don't we start by looking at the US
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  Speaker 2: equity market. John, my colleague here at Blmberg and I.
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  Speaker 2: We look at this all the time, and we keep going.
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  Speaker 2: This is absolutely extraordinary. Everything that's happened since the election,
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  Speaker 2: everything that's happened with the tariff conversations, with the mutterings,
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  Speaker 2: bet recession, no recession, et cetera, et cetera, all the kaos,
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  Speaker 2: all the difficulties, the insanely high valuations, what look like
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  Speaker 2: insanely high valuations to us, and yet in the end
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  Speaker 2: the market is pretty much backward it was. Does that
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  Speaker 2: make sense to you, because it doesn't make.
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  Speaker 3: Sense to us.
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  Speaker 4: It does make sense, Maren, because there is still quite
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  Speaker 4: a bit of money looking for a home. If you
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  Speaker 4: look at the Chicago Fed Conditions Index, something that we
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  Speaker 4: at Causeway watch, they appear reasonably loose. In other words,
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  Speaker 4: credit is still reasonably abundant. People have money to put
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  Speaker 4: to work, an aging population that developed world, they need
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  Speaker 4: to continue to invest. So none of this surprises me.
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  Speaker 4: If we did have persistently higher tariffs and there was
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  Speaker 4: a trade embargoed with China, markets certainly in my view,
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  Speaker 4: would not have recovered the way they did.
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  Speaker 2: Okay, so there are circumstances under which this extraordinary performance
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  Speaker 2: of the US market might come to an end. I mean,
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  Speaker 2: you tend to be quite valuation orientated, right, That's something
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  Speaker 2: that you talk about a lot and think about. So
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  Speaker 2: it must be extraordinary for you to be operating inside
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  Speaker 2: a market that consistently, consistently destroys any sense of value investing.
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  Speaker 4: Well, that's a that's pretty harsh indictment. We at causeway
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  Speaker 4: we invest both quantity and fundamentally. In the fundamental side,
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  Speaker 4: we have much greater emphasis outside the US. They may
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  Speaker 4: do within the US, but in our global equity portfolios
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  Speaker 4: where underweight the US market versus the indices.
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  Speaker 3: And that's from the bottom up.
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  Speaker 4: That's from finding more non US companies that meet our
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  Speaker 4: value criteria. I have gone so far with clients, and
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  Speaker 4: our clients are predominantly institutions, mostly in North America, and
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  Speaker 4: I say to them, non US, particularly non US developed
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  Speaker 4: equities are value relative to the US. However, that doesn't
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  Speaker 4: make them necessarily superior. Underneath that value umbrella, it's really
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  Speaker 4: important for us to look for companies that are well
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  Speaker 4: positioned competitively that have financial strength or are moving toward
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  Speaker 4: much improved balance sheet leverage.
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  Speaker 3: And they are they.
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  Speaker 4: Have the ability or soon we'll have the ability to
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  Speaker 4: return capital to shareholders. I couldn't say this without being
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  Speaker 4: booed out of the room during the long period of
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  Speaker 4: zero or negative interest rates post the Global Financial Crisis
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  Speaker 4: and post COVID. But we're in a normal rate environment
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  Speaker 4: and that makes value really interesting because these stocks where
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  Speaker 4: the market is underestimated their earning potential and where there
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  Speaker 4: can be returns of capital in the form of buybacks
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  Speaker 4: or dividends, that's extremely valuable. So we're more excited about
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  Speaker 4: the value part of our business in fundamental research and
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  Speaker 4: portfolio management than we've ever been.
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  Speaker 3: Okay, that's interesting.
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  Speaker 2: Let's just go back a bit and maybe you could explain,
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  Speaker 2: to explain to our listeners why this is all about
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  Speaker 2: interest rates. It's something we've talked about a lot on
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  Speaker 2: the podcast, but I'd love to hear your take on that.
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  Speaker 2: Why the interest rates that change the environment from growth
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  Speaker 2: to value being interesting.
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  Speaker 3: Think about a stock. What is a stock? What's it worth?
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  Speaker 4: It's worth the present value of all the cash that
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  Speaker 4: can generate into perpetuity. So that's forever hard to imagine
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  Speaker 4: discounted to present, and the discount rate on that long
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  Speaker 4: stream of cash flow when it's near zero, that means
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  Speaker 4: investors are willing to pay anything for that stream of cash.
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  Speaker 4: In fact, investors at a zero rate are indifferent between
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  Speaker 4: cash today or cash tomorrow. That a specuative company that
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  Speaker 4: is promising huge returns sometime in the future is worth
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  Speaker 4: taking a gamble on because there's no cost of money.
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  Speaker 4: When rates rise, especially real interest rates are firmly positive,
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  Speaker 4: then there is a significant cost of money. In other words,
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  Speaker 4: you could put your money in a government deposit, you
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  Speaker 4: could be in a money market fund. You could get
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  Speaker 4: a risk free rate that is just above inflation, so
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  Speaker 4: even after tax, maybe you're above even, but your money's
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  Speaker 4: not shrinking. Or you could own equities, and in our
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  Speaker 4: view that that higher discount rate means there is there
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  Speaker 4: are only certain valuation multiples that make sense. And if
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  Speaker 4: the and if the valuation multiples like a price to
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  Speaker 4: earnings multiple or price to cash flow, if it gets
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  Speaker 4: too high, you have overpaid, and so you paid too
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  Speaker 4: much for that stream of cash, and therefore you're very
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  Speaker 4: unlikely to get your money back.
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  Speaker 2: Okay, so if you live at it like that, an
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  Speaker 2: overload of the American market is overvalued. Yeah, expense to
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  Speaker 2: the market that you wouldn't necessarily want to invest in. Yes,
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  Speaker 2: there are there are expensive parts of the US market,
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  Speaker 2: and there are more growth stocks, there's more technology exposure,
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  Speaker 2: much more from a sector basis in the US than
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  Speaker 2: outside the US, to the tune of like two and
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  Speaker 2: a half times. Okay, So when you take the idea
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  Speaker 2: to your clients that maybe it is time to move
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  Speaker 2: a significant amounts of money out of the US into
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  Speaker 2: more value orientated markets.
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  Speaker 3: What's the reaction.
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  Speaker 2: You're getting a different reaction to now than you might
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  Speaker 2: have gone three four years ago, two years ago, one
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  Speaker 2: year ago.
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  Speaker 4: We are getting a different reaction. A part of that
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  Speaker 4: is the spell is broken. The long period of dollar
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  Speaker 4: ascendency has turned. The US dollars lost some of its strength,
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  Speaker 4: so investors aren't as concerned they'll be this constant if
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  Speaker 4: they're dollar based currency headwind. They're looking for a tailwind now.
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  Speaker 4: But also they recognize they need to be diversified. This
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  Speaker 4: is a watchword of investing, whether it be for individuals
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  Speaker 4: or institutions. And becoming over index to the US market
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  Speaker 4: having too large an exposure just due to the letting
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  Speaker 4: it ride having maybe not rebalanced back to the anacid
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  Speaker 4: allocation that includes non US equities. I think they're nervous
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  Speaker 4: about that now and investors are attempting now to get
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  Speaker 4: more non US So it's not a stampede, but we
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  Speaker 4: definitely see this trend.
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  Speaker 2: It's interesting, this idea, this bell is broken, isn't it
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  Speaker 2: That even though the US marketer is really still performing
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  Speaker 2: remarkably well, there is a sense that it's no longer
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  Speaker 2: in absolutely longer given. It's no longer entirely reasonable to
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  Speaker 2: have the majority of your money tied up in the US.
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  Speaker 2: I mean, we've been looking at the passive investors and
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  Speaker 2: retail investors all around the world are just buying into
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  Speaker 2: global index funds, or even worse, just US index funds,
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  Speaker 2: and even if they're in global, they'll have six seventy
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  Speaker 2: percent of their money in one market. And it's hard
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  Speaker 2: for people to turn from saying that that isn't really
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  Speaker 2: the type of diversification that we've meant historically.
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  Speaker 4: And there are catalysts for Europe in particular that we
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  Speaker 4: haven't seen in a long time. And some of this
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  Speaker 4: is a byproduct of the political, diplomatic and terror related
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  Speaker 4: stresses put on Europe, but needing to spend on defense
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  Speaker 4: several percentage points more in terms of GDP. That's hundreds
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  Speaker 4: of billions of euros of additional spending infrastructure. Having a
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  Speaker 4: need now urgently for a harmonized EU capital market. All
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  Speaker 4: of this speaks to the potential for Europe to become
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  Speaker 4: a more attractive place for capital and even if it
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  Speaker 4: isn't all realized, just some of it at the margin
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  Speaker 4: that will help close that valuation gap, not close it completely,
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  Speaker 4: but just narrow it from this extremely expensive US market
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  Speaker 4: versus rest of world, in particular Europe in the UK.
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  Speaker 2: Yeah, so a big part of this is really about
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  Speaker 2: the fiscal shift. So if in the US stimulus has
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  Speaker 2: really reached something a limited at this point and that's
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  Speaker 2: much discussed, whereas in Europe the space for fiscal stimulus
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  Speaker 2: and that's going to drive this coming together evaluations.
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  Speaker 3: Yeah, fiscal rope in the US.
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  Speaker 4: My colleagues and I Cosway looked at to breakdown of
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  Speaker 4: what created such a massive performance increase premium US versus
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  Speaker 4: Let's just take Europe over the last decade and yes,
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  Speaker 4: much greater sales growth in the US was a large contributor,
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  Speaker 4: but the second largest contributor was multiple appreciation. In other words,
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  Speaker 4: multiples just rose in the US. And we think a
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  Speaker 4: good part of this is a function of a lot
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  Speaker 4: of fiscal stimulus, and that stimulus now has to be
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  Speaker 4: curtailed because of the US bond market is going to
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  Speaker 4: constrain the politician's ability to keep spending with abandon.
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  Speaker 2: And let's stick with America for a moment. Do you
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  Speaker 2: see that the new tariff regime, Not that we're entirely
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  Speaker 2: sure exactly what it's going to be after this little
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  Speaker 2: truth in ninety days, but we still don't know what
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  Speaker 2: we are obviously, But do you see any sense that
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  Speaker 2: that might end up being good for parts of US business?
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  Speaker 2: That we may see this manufacturing renaissance which may change
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  Speaker 2: the way the enemy works and hence the way the
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  Speaker 2: market can be valued.
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  Speaker 4: From a causeway research perspective, we think it's unlikely. At
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  Speaker 4: the margin, maybe more auto manufacturing, because that's one area
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  Speaker 4: where President Trump is very keen to ensure there's more onshoring,
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  Speaker 4: but there are low end products from just about everything
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  Speaker 4: in the electronics components, consumer goods. Think about toys, for example, textiles,
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  Speaker 4: they don't belong in a US manufacturing context unless fully automated.
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  Speaker 4: And who's going to pay that upfront bill for those
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  Speaker 4: automated factories? The returns don't make sense for companies, and
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  Speaker 4: without some sort of bizarre government subsidy, we think it's
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  Speaker 4: very unlikely. So those maybe some of that will move
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  Speaker 4: out of China, as it already has, but it will
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  Speaker 4: go to friendly countries and they will and it won't
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  Speaker 4: be on you in US soil. We just can't see
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  Speaker 4: a mannerfacturing renaissance. What we'd like to see is an
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  Speaker 4: education renaissance, but that hasn't been mentioned yet.
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  Speaker 3: All right, well, let's have a look then at Europe.
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  Speaker 2: And in one of the pieces that you wrote recently,
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  Speaker 2: you've got a great shot which shows the extent of
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  Speaker 2: Germany's fiscal boost and it shows that if it works
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  Speaker 2: out as expected at the moment, it would be a
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  Speaker 2: bigger physical booth than the Marshall Plan, a bigger physical
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  Speaker 2: boots than the reunification of Germany, etc.
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  Speaker 3: I mean as significantly bigger.
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  Speaker 2: Actually, And on your chart you've got that fairly clearly
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  Speaker 2: divided between infrastructure and defense. So if you were investing
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  Speaker 2: into Europe, you are slee Are those the sectors that
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  Speaker 2: you're looking at.
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  Speaker 4: Most of the European listed defense stocks started moving last
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  Speaker 4: year and they've had a significant run, so the market's
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  Speaker 4: already gotten there. But the defense spending leads to a
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  Speaker 4: whole ecosystem of stimulus in Europe. And one of the
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  Speaker 4: companies that we like very much is in green transportation.
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  Speaker 4: It's Alstam. They're the France listed world's largest manufacturer of
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  Speaker 4: rail a rail equipment and signaling. They make the bulk
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  Speaker 4: of their profits from services, in other words, servicing and
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  Speaker 4: maintaining and upgrading these rail systems, whether they be rails
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  Speaker 4: or subways or subway cars. And this is a company
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  Speaker 4: that governments around the world and as well as in Europe,
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  Speaker 4: recognizing more urbanization, will be spending on improving public transport,
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  Speaker 4: long term contracts, very long term customers, well positioned. They
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  Speaker 4: made some unfortunate acquisitions in the past which created some
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  Speaker 4: contracts that were mispriced, and they management team has been upgraded.
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  Speaker 4: This is just the sort of stock we like. At Causeway,
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  Speaker 4: where investors had lost interests they thought the business wouldn't
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  Speaker 4: do well, particularly given inflation and the cost of their contracts,
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  Speaker 4: but we saw a management team capable of creating an
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  Speaker 4: earnings turnaround and thus more cashful for shareholders. And it's
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  Speaker 4: a it's a stock very emblematic of what I think
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  Speaker 4: of as sort of the new Europe, where efficiency is
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  Speaker 4: the watchword, corporate managements know they need to deliver for shareholders.
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  Speaker 4: And then that's all very synergistic with ensuring the prosperity
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  Speaker 4: of Europe and beyond.
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  Speaker 2: Yeah, and when we look at at infrastructure, I was
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  Speaker 2: at a defense conference last week and a lot of
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  Speaker 2: the discussion was around how infrastructure is effectively defense to
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  Speaker 2: a degree, and that if you don't have a national
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  Speaker 2: grid that works, you kind of stuffed before you even begin, right,
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  Speaker 2: if you can't keep the electricity on in Fain and
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  Speaker 2: Buttugal and France, then deciding from a pretty lousy base.
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  Speaker 2: There's this blur between what is defense and what is
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  Speaker 2: infrastructures that we would expect an awful lot of money
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  Speaker 2: to go into, for example, electricity grids.
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  Speaker 3: Oh yes, across Europe, oh.
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  Speaker 4: Oh, very definitely already has and will continue to do so,
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  Speaker 4: and rate bases will reflect that. But one area you
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  Speaker 4: haven't mentioned that it's also very I think is very
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  Speaker 4: interesting is how will in an aging population that boost
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  Speaker 4: in manufacturing and all the stimulus, how will it translate
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  Speaker 4: into output? And that's through automation. And although there are
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  Speaker 4: interesting there are very well placed automation companies like parts
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  Speaker 4: of Zeman's in Europe. The ones that are the most
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  Speaker 4: undervalued and we think the greatest upside are actually in Japan,
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  Speaker 4: companies like Panic in robotics or SMC in pneumatic equipment.
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  Speaker 4: This is very I can see how people would be
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  Speaker 4: board stiff listening to this, but this these are the
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  Speaker 4: building blocks of manufacturing and of and of ensuring that
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  Speaker 4: for example, the automotive industry or electronics industry, whatever it
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  Speaker 4: is that where Europe or the US needs to onshore
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  Speaker 4: for national security reasons that automation is essential for productivity.
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  Speaker 3: It's interesting, isn't it.
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  Speaker 2: There's a big divergence between the levels of robotics in
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  Speaker 2: different economies. I mean, the UK were absolutely useless. We
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  Speaker 2: have one of the lowest ratios of robotics to workers
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  Speaker 2: of any developed countries. But some European countries are much
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  Speaker 2: better at than we are.
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  Speaker 4: But the UK will likely catch up and the AI
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  Speaker 4: enabled robotics will transform how products are manufactured and for
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  Speaker 4: the better. That should ensure that we can, even with
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  Speaker 4: a limited labor force, create the output necessary for GDP growth.
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  Speaker 2: So Japan is already responding to this demographic crisis that
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  Speaker 2: we're seeing across the cross the rest of the Western world,
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  Speaker 2: and they've done that to a large degree with much
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  Speaker 2: more in the way of robotics, automation, etc. Than we
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  Speaker 2: use elsewhere. And that's been relatively sex that's full in
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  Speaker 2: the GDP ahead in particular hasn't follen or come off
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  Speaker 2: in the way that many expected.
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  Speaker 3: So we have an example to follow.
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  Speaker 4: Yes, yes, their demographic situation is more dire than that
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  Speaker 4: of just about anywhere else, but I would agree with that,
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  Speaker 4: and that technology is homegrown for them.
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  Speaker 3: All the good.
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  Speaker 2: Robotics companies outside Japan that you're interested in.
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  Speaker 4: There are good ones that values are really in Japan.
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  Speaker 4: And this has part lead to do with the fact
• 17:27
  Speaker 4: that the end had been extremely the en it's been
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  Speaker 4: very volatile and now settling around one hundred and forty
• 17:35
  Speaker 4: five yen to the dollar. I think that investors are
• 17:38
  Speaker 4: concerned that the end may con might go on another
• 17:42
  Speaker 4: bout of appreciation which would be somewhat detrimental for these companies.
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  Speaker 4: They do slightly better in a weaker yen environment.
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  Speaker 2: Do you have other investments in Japan with terrib qing one,
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  Speaker 2: we're always talking about what amazing value it isn't and
• 17:56
  Speaker 2: coblitely being mildly disappointed by it.
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  Speaker 4: Amongst us c of what i'd call maybe mediocre corporate
• 18:02
  Speaker 4: governance type companies, there are some extraordinary world champions companies
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  Speaker 4: like Murata in multi layer ceramic capacitors. They are the
• 18:12
  Speaker 4: best in the business, just the way SMC is the
• 18:15
  Speaker 4: best in pneumatic equipment. Imagine being number one across your
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  Speaker 4: different industry verticals and marauder trades is if it's just
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  Speaker 4: it's a cyclical aticyclical low so low in price to
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  Speaker 4: book terms, low and uh in prospective pe multiple terms,
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  Speaker 4: because investors haven't seen the kind of smartphone sales for example,
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  Speaker 4: that would that would propel this stock forward. But what
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  Speaker 4: we do know is that edge devices are coming, and
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  Speaker 4: that our device is whether it be p seeds or
• 18:44
  Speaker 4: smartphones or any other type of device than wearables well
• 18:49
  Speaker 4: glasses for example, they'll be AI enabled. This is all
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  Speaker 4: inevitable and the key for US at causeway is, find
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  Speaker 4: these great companies when they're at sickle lows, be prepared
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  Speaker 4: to own them for several quarters while the market digests
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  Speaker 4: the disappointing news, and then then have a large position
• 19:12
  Speaker 4: when the cycle turns upward.
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  Speaker 2: Do you have any interest in the UK market? Do
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  Speaker 2: you find you're talking about finding innovative companies, interesting companies,
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  Speaker 2: best in class companies When you look at the UK
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  Speaker 2: you can definitely find.
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  Speaker 3: Value here, yes, But can you find that kind of.
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  Speaker 4: Value companies in the throes of operational restructuring? We can
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  Speaker 4: find that, and I consider that to be derivative innovation
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  Speaker 4: because it requires tremendous discipline, requires management being able to
• 19:44
  Speaker 4: extract something from the business that no one else has
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  Speaker 4: done before. And the best example I can give is
• 19:49
  Speaker 4: the UK aerospace company Rolls Royce at near death in
• 19:54
  Speaker 4: early twenty twenty during covid is wide body aircraft engines
• 19:59
  Speaker 4: that they manufacture. Planes were grounded, no flying hours or
• 20:03
  Speaker 4: little to know. The cash flow went into the red
• 20:07
  Speaker 4: and the company had to do an enormous rights issue.
• 20:10
  Speaker 3: It looked very bleak, but a CEO upgrade.
• 20:14
  Speaker 4: And a transformation of that business into this world class
• 20:19
  Speaker 4: company that's in a duopoly with ge and what we've
• 20:24
  Speaker 4: seen out of that is cash flow generation galore. And
• 20:27
  Speaker 4: that's a testament to the governance to the chairwoman need
• 20:31
  Speaker 4: a freu and a determination to get the right person
• 20:34
  Speaker 4: in the top job. We like to see that, and
• 20:37
  Speaker 4: when we see it, we are backing it.
• 20:39
  Speaker 3: Are you still backing if you still invested in real road? Yes,
• 20:42
  Speaker 3: we are.
• 20:42
  Speaker 4: How often does a value investor, which we are in
• 20:46
  Speaker 4: our global equity portfolio, how often do we get access
• 20:50
  Speaker 4: to a duopoly? What does it mean to be in
• 20:53
  Speaker 4: in a monopolist or a duopolist. It means you have
• 20:56
  Speaker 4: either none or one competitor, and that translates into pricing power.
• 21:01
  Speaker 4: Being able to go back to your customers and say
• 21:05
  Speaker 4: we're raising price and have no pushback at all. Rare
• 21:09
  Speaker 4: and in this environment.
• 21:11
  Speaker 3: We like that.
• 21:12
  Speaker 4: We like to see and that's why I mentioned Alstam
• 21:15
  Speaker 4: for example, being excellent at what they do in rail
• 21:19
  Speaker 4: cars and rail signaling gives them that pricing power and
• 21:22
  Speaker 4: having very few competitors, but roles having just one major competitor,
• 21:27
  Speaker 4: and wide body aircraft engines they're in a they're in
• 21:30
  Speaker 4: the catbird seat.
• 21:32
  Speaker 2: If you look at things like that, But you're also
• 21:35
  Speaker 2: a valuation driven What is the signal for you, even
• 21:39
  Speaker 2: with an amazing company like that, to say, Okay, you're
• 21:43
  Speaker 2: producing vast and masive cash, you're a dua believe you
• 21:45
  Speaker 2: have pricing power. We love that, but now you're too expensive.
• 21:49
  Speaker 3: Where are your parameter?
• 21:51
  Speaker 4: So we work on a risk adjusted return basis, and
• 21:55
  Speaker 4: what that means is that for every stock that we
• 21:58
  Speaker 4: consider for our global Portfoliolo, we Causeway portfolio managers and
• 22:03
  Speaker 4: analysts and they're about twenty seven of us. We determine
• 22:10
  Speaker 4: the two year price target for the stock, where should
• 22:13
  Speaker 4: that stock trade two years from now based on the
• 22:16
  Speaker 4: as we discussed its earnings in cash flow, and then
• 22:20
  Speaker 4: we risk adjust that So using our quantitative multi factor
• 22:24
  Speaker 4: risk model, which sounds very complicated and isn't, we're determining
• 22:29
  Speaker 4: the incremental or additional amount of volatility that stock will
• 22:33
  Speaker 4: add to our existing portfolio if we actually bought more
• 22:36
  Speaker 4: of it. And some stocks add to risks we already have,
• 22:42
  Speaker 4: so they are very high risk and therefore on a
• 22:45
  Speaker 4: risk adjusted return basis, the risk will will make them
• 22:49
  Speaker 4: less attractive. And then there are other stocks that may
• 22:52
  Speaker 4: have very high returns but have very modest amounts of
• 22:56
  Speaker 4: additional risk that they pose to the portfolio, and they
• 22:59
  Speaker 4: will look very attractive. So we rank all these stocks.
• 23:03
  Speaker 4: We rank about one hundred and fifty stocks globally, the
• 23:07
  Speaker 4: ones we're most interested in on risk adjusted return, and
• 23:12
  Speaker 4: the highest ranking stocks the top fifty are typically well
• 23:17
  Speaker 4: represented in the portfolio, and the higher they rank, the
• 23:21
  Speaker 4: more we generally own. And as they do well, as
• 23:24
  Speaker 4: the price of the stock rises, unless we're raising our
• 23:29
  Speaker 4: to year price target, that means the prospective return is diminishing.
• 23:34
  Speaker 4: So the stock is descending, it's falling in that ranking,
• 23:37
  Speaker 4: and as it does, I'm finally answering your question, that's
• 23:41
  Speaker 4: when we sell, or would trim the stock at least,
• 23:45
  Speaker 4: if not sell out completely, and then reinvest the proceeds
• 23:49
  Speaker 4: those sell proceeds back into you guessed it, the highest
• 23:52
  Speaker 4: ranking stocks. This discipline process ensures there are no politics
• 23:57
  Speaker 4: in our approach. There's no seniority, there's no committee myopia.
• 24:03
  Speaker 4: It's all about what the stock can deliver risk adjusted
• 24:06
  Speaker 4: versus all the other candidates we have.
• 24:08
  Speaker 3: That is a bottom up process. Okay, interesting, he did
• 24:12
  Speaker 3: answer my question. That was a great answer. Really interesting.
• 24:15
  Speaker 2: Take you, but Listen, all the companies that we've talked
• 24:19
  Speaker 2: about so far have been very big. We've talked about
• 24:22
  Speaker 2: large caps, but I know you also have an interest
• 24:24
  Speaker 2: in smaller companies, which of course as well if you
• 24:26
  Speaker 2: really are a value investor. There's a lot of value
• 24:29
  Speaker 2: knocking around in small caps globally, even in the US.
• 24:32
  Speaker 2: There's a lot of value. That certainly is in the
• 24:34
  Speaker 2: UK where our smaller and midsized companies are on their
• 24:36
  Speaker 2: knees valuation wise.
• 24:39
  Speaker 3: Tell me what your thoughts are there. Well, if they're
• 24:41
  Speaker 3: very small, we stay away.
• 24:43
  Speaker 4: We need at least a billion US dollars in market cap,
• 24:47
  Speaker 4: and that would be an all free float.
• 24:49
  Speaker 3: In other words, there can't be a large insider holding.
• 24:51
  Speaker 4: There needs to be lots of trading liquidity, and I'd
• 24:55
  Speaker 4: say we're more comfortable in the three billion dollar and
• 24:59
  Speaker 4: higher level, where we have the ease and liquidity of
• 25:03
  Speaker 4: entering the stock and exiting as we see fit. In
• 25:07
  Speaker 4: that what I think of is more MidCap area. There
• 25:10
  Speaker 4: are plenty of stocks, there are no shortage of them.
• 25:14
  Speaker 4: The Smiths Group here in the UK is one we
• 25:18
  Speaker 4: like very much, or also in the UK SSP group,
• 25:23
  Speaker 4: wh Smith another one that when cause we gets excited
• 25:27
  Speaker 4: about these stocks. We end up owning five six, seven, eight,
• 25:30
  Speaker 4: nine ten percent of the outstanding shares and you can
• 25:34
  Speaker 4: understand our commitment because that means that we're in It's
• 25:38
  Speaker 4: going to be quite difficult to extricate our clients if.
• 25:41
  Speaker 3: We called it wrong.
• 25:42
  Speaker 4: So are the lesser liquid stock. The smaller it is,
• 25:46
  Speaker 4: the more we need to be absolutely certain that we
• 25:50
  Speaker 4: are We've made the right decision, and we believe that
• 25:53
  Speaker 4: the management team can affect the operational turnaround, the improvement
• 25:59
  Speaker 4: in earnings and cash that that we suggest that they should.
• 26:04
  Speaker 3: What's the case for wh Smith wh Smith this morning? Yeah?
• 26:12
  Speaker 4: Travelings, Well, travel is the case. And of all the
• 26:17
  Speaker 4: areas of consumer discretionary spend, travel is one that seems
• 26:21
  Speaker 4: to be most resilient and with travel comes expenditures. A
• 26:29
  Speaker 4: cousin to that is another stock we like very much,
• 26:33
  Speaker 4: List in the UK and also in the US. But
• 26:36
  Speaker 4: Panamanian Carnival Cruise. This is travel on steroids because this
• 26:42
  Speaker 4: is the world's largest cruise company fourteen million passengers last
• 26:47
  Speaker 4: year and they are now bringing passengers to their own
• 26:52
  Speaker 4: private islands to keep spending. So travel and spending go
• 26:56
  Speaker 4: hand in hand. And if you have a captive customers
• 26:59
  Speaker 4: you do with WHMI given their franchises and in airports
• 27:03
  Speaker 4: and train stations, or you do with Carnival, you've got
• 27:06
  Speaker 4: this cash flow machine. Carnival hasn't been a debt, but
• 27:10
  Speaker 4: they're able. They've already been announced some significant refinancing and
• 27:15
  Speaker 4: the trends look really good. They're eighty percent booked through
• 27:18
  Speaker 4: the end of twenty twenty five. That's a high level
• 27:21
  Speaker 4: of confidence even as we started this conversation in a
• 27:26
  Speaker 4: world of tariff uncertainty.
• 27:29
  Speaker 2: W A. Smith also fits into your monopoly duopoly idea,
• 27:33
  Speaker 2: doesn't it, And that it's pretty much the only place
• 27:35
  Speaker 2: you can buy a newspaper at the app works in
• 27:37
  Speaker 2: the UK.
• 27:37
  Speaker 3: There are no other options. That's it.
• 27:40
  Speaker 2: The only place to buy your every thrillers and your
• 27:43
  Speaker 2: overpriced water and your sandwich, et cetera.
• 27:45
  Speaker 3: It is W A. Smith. Carnival has competition.
• 27:48
  Speaker 4: Well not really though I would really back on that Carnival.
• 27:52
  Speaker 4: You're on those ships, there is no competition. There is
• 27:56
  Speaker 4: nowhere to go. And when you're on their own private
• 27:58
  Speaker 4: island like Carnival with their launching in July, it's all theirs.
• 28:04
  Speaker 4: So no In fact, they have created. Once you have
• 28:07
  Speaker 4: bought that ticket and step more.
• 28:09
  Speaker 3: Go on another ship. You can go on another ship.
• 28:11
  Speaker 3: There quite a few crews go not.
• 28:12
  Speaker 4: Once you've once you've embarked, you have no choice. You're stuck.
• 28:17
  Speaker 4: Where is Carnival Cave? This is fascinating. I did not
• 28:19
  Speaker 4: know celebration. They're all these private islands are in the Bahamas.
• 28:23
  Speaker 2: So you go there in the cruise ship, you anchor
• 28:26
  Speaker 2: off the private island. You spend, but you don't stay
• 28:29
  Speaker 2: on the private island. You spend more of your money
• 28:31
  Speaker 2: on the private extent. You get back on the ship
• 28:32
  Speaker 2: and off you go again.
• 28:33
  Speaker 4: Yes, you go and spend money on the private island,
• 28:36
  Speaker 4: enjoying yourself with kayaking and water slides and I think
• 28:41
  Speaker 4: a tremendous amount of alcohol. Then you get back on
• 28:43
  Speaker 4: the ship and spend some more.
• 28:45
  Speaker 2: And is this all part of the story about I mean,
• 28:48
  Speaker 2: I've been writing a bit about the travel industry and
• 28:51
  Speaker 2: the rise in the amount of money that people are
• 28:54
  Speaker 2: prepared to spend on travel, which is maybe partly about
• 28:58
  Speaker 2: COVID and people thinking, well, now I wan't to e
• 29:00
  Speaker 2: experience as opposed to stuff, but also partly and this
• 29:03
  Speaker 2: brings us back to the conversation we had earlier about
• 29:05
  Speaker 2: the present value of cash, but also the present value
• 29:10
  Speaker 2: of an experience is hugely enhanced by social media because
• 29:15
  Speaker 2: the experience has more status value out with the actual experience,
• 29:20
  Speaker 2: and you can keep it rolling for a long time,
• 29:22
  Speaker 2: so it has a value that isn't immediate and it's
• 29:26
  Speaker 2: just different and that gives it more value. Is that
• 29:28
  Speaker 2: part of that whole vibe.
• 29:30
  Speaker 4: Yes, the baby boomers supposedly aren't this experience focused, but
• 29:35
  Speaker 4: we've seen indications to the contrary, and travel dollars leisure,
• 29:39
  Speaker 4: travel dollars to cruises seems to be very heavily skewed
• 29:43
  Speaker 4: toward that demographic.
• 29:44
  Speaker 3: It's not the young.
• 29:45
  Speaker 2: I thought that what we were saying was a rise
• 29:47
  Speaker 2: in younger people spending more money than you would expect
• 29:51
  Speaker 2: on vacation experience.
• 29:53
  Speaker 4: Well, at the margin, there are more than you'd expect,
• 29:56
  Speaker 4: but it's still dominated by the retiree set. To your point,
• 30:01
  Speaker 4: they're very keen on experiences and are willing to spend
• 30:04
  Speaker 4: there in ways they wouldn't spend in any other type
• 30:07
  Speaker 4: of leisure.
• 30:09
  Speaker 3: What about what about emerging markets.
• 30:12
  Speaker 2: We've mainly talked about development markets across across this gal a.
• 30:15
  Speaker 2: There emerging markets where you up finding interesting stocks that
• 30:18
  Speaker 2: maybe Asia, maybe Latin America.
• 30:20
  Speaker 4: We have a separate quantitabily managed emerging market fund that
• 30:24
  Speaker 4: is overweight Asia at present and even overweight China and
• 30:30
  Speaker 4: invests across the whole array of emerging markets. And then
• 30:33
  Speaker 4: within our global fundamental strategy we have some exposure. The
• 30:39
  Speaker 4: one emerging market that actually really should be classified as
• 30:42
  Speaker 4: developed where we have the most is likely South Korea,
• 30:46
  Speaker 4: and that has a lot to do with under evaluation
• 30:50
  Speaker 4: and the star performer there is some such Electronics, the
• 30:54
  Speaker 4: world's leader in memory semiconductors. They've a big consumer electronics business,
• 31:00
  Speaker 4: displays business, but Samsung trades like a cyclical memory semiconductor stock.
• 31:07
  Speaker 4: So when the memory semiconductor environment is oversupplied and prices
• 31:13
  Speaker 4: are falling faster than usual, the stock price tanks, and
• 31:17
  Speaker 4: it's in that lower level evaluation now. But what we know,
• 31:22
  Speaker 4: and it's Brian Chow who heads up our technology research
• 31:26
  Speaker 4: A Causeway says over and over again to the team,
• 31:29
  Speaker 4: compute equals memory. In other words, the more compute needed,
• 31:35
  Speaker 4: and every enterprise we talk to is adding compute capability.
• 31:39
  Speaker 4: They're moving their it to the cloud. They need to
• 31:42
  Speaker 4: be able to take all the data they have and
• 31:44
  Speaker 4: be able to extract important signals from that. They're using
• 31:48
  Speaker 4: AI ways they never did before. And that's just the start.
• 31:53
  Speaker 4: So the demand for memory and it'll be come from
• 31:56
  Speaker 4: s k Heinex, from then from Micron. In the US,
• 31:58
  Speaker 4: these three giants control the bulk of the memory semiconductor market.
• 32:03
  Speaker 4: This to us is just another example of the market saying, oh,
• 32:07
  Speaker 4: short term cycles down, we don't want it, and we
• 32:11
  Speaker 4: causeways say we want as much as we can get
• 32:13
  Speaker 4: because we know when the cycle turns up we will
• 32:16
  Speaker 4: have a very low entry price and therefore tremendous returns.
• 32:21
  Speaker 3: So you use to see it c polygopoly.
• 32:24
  Speaker 4: Yes, there's yes, this one in an oligopoly well put,
• 32:27
  Speaker 4: and it doesn't necessarily lead to tremendous pricing power, but
• 32:33
  Speaker 4: it does. There is a moat, and the moat is
• 32:35
  Speaker 4: the incredible cost of building these the fabs in order
• 32:40
  Speaker 4: to manufacture these semiconductors three billion dollars each or something
• 32:45
  Speaker 4: of that magnitude.
• 32:46
  Speaker 3: The hell of a barrier to entry.
• 32:47
  Speaker 2: Yes, do you hold any commodities companies any minus anything
• 32:52
  Speaker 2: like that?
• 32:53
  Speaker 4: We do our sol or matol in steel. Why would
• 32:58
  Speaker 4: anybody buy steel in the Chinese they're dumping it? In
• 33:00
  Speaker 4: their thesis is they can't. And that's one thing that's
• 33:03
  Speaker 4: coming out of this tariff Breujaha, which is steel simply
• 33:08
  Speaker 4: can't be dumped on any The US in Europe are
• 33:12
  Speaker 4: going to be very careful to ensure that that isn't happening.
• 33:15
  Speaker 4: And you can't tranship it through Vietnam. It's still steel.
• 33:20
  Speaker 4: It can't be hidden our salaries to have a terrible
• 33:23
  Speaker 4: bound sheet now it's absolutely fantastics. They have a lot
• 33:26
  Speaker 4: of financial strength, so they have the ability to weather
• 33:30
  Speaker 4: all sorts of storms. But the need for steel is inexorable.
• 33:35
  Speaker 4: And maybe no big huge housing boom, but it doesn't matter.
• 33:39
  Speaker 4: And the surplus coming out of China, if it's controlled,
• 33:42
  Speaker 4: means that pricing should be better. So there's one. And
• 33:45
  Speaker 4: we also like Smurf at West Rock and Packaging, just
• 33:50
  Speaker 4: very very well managed business. And the concern about tariffs
• 33:56
  Speaker 4: and less shipments for linerboard container board demand would drop,
• 34:01
  Speaker 4: we consider that to be temporary and that ultimately e
• 34:05
  Speaker 4: commerce is a trend that doesn't stop and there will
• 34:08
  Speaker 4: be more need for their product. So we'll go for
• 34:11
  Speaker 4: a commodity company, if a very well managed b we
• 34:16
  Speaker 4: think the commodity itself has a reasonably rosy future, and
• 34:20
  Speaker 4: the balance sheet is excellent because commodity stocks can be volatile,
• 34:24
  Speaker 4: and the last thing you want is financial leverage along
• 34:28
  Speaker 4: with operating leverage.
• 34:30
  Speaker 3: Okay, brilliant, that's a great one. Thank you for that. Listen.
• 34:33
  Speaker 3: I've taken up an overload of the other time.
• 34:35
  Speaker 2: So I just got a couple of quick questions that
• 34:38
  Speaker 2: I kind of ask everyone at the end, and if
• 34:41
  Speaker 2: you don't have an answer, absolutely fine, Okay, But I
• 34:46
  Speaker 2: wonder if I were to offer you a choice of
• 34:49
  Speaker 2: bitcoin of gold, which you might take.
• 34:52
  Speaker 4: I own some bitcoin and I don't own any gold,
• 34:54
  Speaker 4: but I own bitcoin because my kids shame me into it.
• 35:02
  Speaker 3: What can we do to shame you into buying some gold.
• 35:06
  Speaker 4: I think if the gold price sagged again, I might
• 35:09
  Speaker 4: consider it, But given how strong it's been, and I
• 35:13
  Speaker 4: understand in part the reasons, and we can see that
• 35:16
  Speaker 4: there's central bank buying, there's individual buying. There's a lot
• 35:20
  Speaker 4: of concern about about fiat currency being oversupplied, and that's
• 35:26
  Speaker 4: all very legitimate, and that's in part what drives the
• 35:29
  Speaker 4: demand for cryptocurrencies, especially the leaders like bitcoin. But at
• 35:33
  Speaker 4: least with crypto, there's you get to partake in it,
• 35:37
  Speaker 4: an exciting future that involves blockchain. Gold is just a
• 35:42
  Speaker 4: lump and I just have very little to say about
• 35:46
  Speaker 4: gold except without earnings and without cash flow, I'm less interested.
• 35:51
  Speaker 2: Yeah, it's just not an asset for you. And what
• 35:54
  Speaker 2: are you reading at the moment? Financial and non financial?
• 35:56
  Speaker 3: We don't care we this episode.
• 35:58
  Speaker 4: I think lately it's been mostly posts that I've enjoyed
• 36:01
  Speaker 4: because I'm trying to get more technologically savvy, listening to
• 36:05
  Speaker 4: Mark Zuckerberg talk about Lama models.
• 36:10
  Speaker 2: But.
• 36:12
  Speaker 4: Get my head around what was going on in the
• 36:13
  Speaker 4: US administration. So I jd Vance's book. I read that
• 36:20
  Speaker 4: it helped me understand his background and maybe how the
• 36:26
  Speaker 4: perspective he comes from.
• 36:29
  Speaker 3: He'll billy elogy.
• 36:30
  Speaker 4: But since then, I think I've just cooled on books
• 36:33
  Speaker 4: and I'm more podcast focused.
• 36:36
  Speaker 2: Okay, good, that's what I like to hear. Anyway, I
• 36:39
  Speaker 2: don't know how publishers would like to hear that. I'm
• 36:41
  Speaker 2: very keen to hear that about you and podcasts. Thank
• 36:44
  Speaker 2: you so much for doing us today. That was really
• 36:46
  Speaker 2: interesting and I think incredibly useful.
• 36:47
  Speaker 3: Thank you, Thank you.
• 36:54
  Speaker 2: Thanks for listening to this week's maryn Talks Money. If
• 36:56
  Speaker 2: you like us to rate, review and subscribe wherever you
• 36:58
  Speaker 2: listen to podcasts, and keep sending your questions or comments
• 37:01
  Speaker 2: to Merin Money at Bloomberg dot net. You can also
• 37:04
  Speaker 2: follow me and John on Twitter or x. I'm Marinus
• 37:07
  Speaker 2: w and John is John Underscore Stepic. This episode was
• 37:10
  Speaker 2: hosted by Me Maren Sumset Web. It was produced by
• 37:13
  Speaker 2: Samasadi Moses andam and tala Amadi. Sound designed by Blake
• 37:16
  Speaker 2: Maples and special thanks of cost Sarah catter Up