Linda Duessel: Hello and welcome again to the Hear and Now Podcast, from Federated Hermes. I'm Linda Duessel, Senior Equity Strategist. And today I'm joined via phone by Martin Schultz, Managing Director of International Growth Equity. Today, we're going to discuss the opportunities in international markets and one particular area of interest, electric vehicles. Martin, why is now a good time for investors to think internationally?
Martin Schulz: Well, thanks Linda. Look, the US has done exceedingly well. The markets in the US have done very, very well in fact, relative to the rest of the world. And it reminds me a lot of the late 1990s, when I first got involved in the business. And it was a time when the US dollar was strong. It was a time when obviously innovation and other factors and flows were very strong. But we're in that very similar situation right now where I'm not calling for an internet bubble of any stretch of the imagination, but we are seeing that it's been tough as an international investor for the last few years, but it reminds me of the late 1990s. When for that next decade, it was a period in which if you weren't diversified, it would have hurt you. And so we are seeing valuations, obviously be much better richer in the US, better outside of the US. We're also seeing dollar weakness starting to basically after the Trump tax cuts, we saw it strengthen the dollar, and then obviously the Chinese tariffs.
Martin: Other reasons why the dollar strengthened, as you may recall, if you are invested abroad and the dollar strengthens, it goes against you and it weekends it's better for you as an investor. And so we see also the global synchronized recovery being very positive for international investors as there's this risk off movement. And so we actually feel that global investors are starting to look abroad, particularly emerging markets, where they see better opportunity.
Linda: Well, you bring up an interesting point about the US dollar and US has been the way to invest hasn't it, for quite some years now? And doesn't the dollar go in long stretches of bullish or bearish timeframes? Are we in your view headed towards a longer period of a bearish US dollar versus the rest of the world that would really want us to highlight international investing?
Martin: We feel that we probably are in that early stages, if you will, of a dollar decline near term. Again, if you look at history, you just mentioned that these cyclical kind of components to the dollar, generally they go between five and seven and sometimes nine years of either dollar outperformance or underperformance. And so obviously, as I just mentioned, there are a few catalysts that kept the dollar at higher levels recently than they probably otherwise would have been.
Martin: We do feel that we're in the early innings, if you will, of further dollar depreciation, if you think about what the US Fed is doing, obviously putting so much liquidity out there, lots of liquidity in the international markets and that means there are lots of dollars. And so the dollar strength will probably dissipate over time and we do feel ... and again, it doesn't mean it's in a straight line. At the end of the day, you do see near term blips of a dollar outperformance, or under-performance again, relative to the underlying trend. But we do expect that the dollar for the next several years will be on a declining trend.
Linda: And that'll be a tailwind for international. And I know Martin, that you are involved in both developed and emerging markets. Do you favor one or the other more now versus what you're seeing in the trends and valuations?
Martin: Well, that's a great question, Linda. So we use a top-down country allocation process that really, identifies those markets and those regions we feel outperform. And what we're seeing really, the first time in a long time, on the one hand, we're seeing that Japan is starting to be a little more interesting and Southeast Asia. But really, that the biggest takeaway is that the emerging markets are currently the highest proportion of the highest focus, if you will, or a top on country allocation process. What that means is we're looking for those markets that are undervalued and have the least amount of risk. And in that context, we are at the highest level of emerging markets exposure we've ever been since the late 1990s. And so on the one hand, Asia obviously has done fairly well, but we are seeing that potentially places like Latin America, for example will see a recovery trade and where we see some opportunity. So probably the biggest takeaway is the EM piece of it is much more attractive at the present time.
Linda: And that's very, very interesting too, because I know we hear about the Eurozone area being one that maybe the valuations are very enticing. But then we're also, I think hearing about COVID setbacks over there and how the United States is really racing ahead in terms of getting past all this. Does that have any effect on your views towards the Eurozone and maybe taking some exposure there with the valuations being historically rather inexpensive?
Martin: Yeah, you bring up a really good point. I haven't brought up the European union and EMU. We actually do feel that the EMU has some valuation support. And you're absolutely right, there's currently delay if you will, in the way and manner in which the different regions of the world, if you will, are going to extricate themselves with the COVID pandemic. And there have been some setbacks, but we do expect that this is just a delay. And so for Europe, we are specifically more focused on non EMU markets. And so markets such as Switzerland or the Nordics that are more open to international trade, where we expect to see a continued boom happening. And so EMU is basically European Monetary Unit is obviously cheap. It is actually more as cyclical well. And so while we're staying away from some of the financials, we are invested in a lot of the companies that have global ties and trade. And so the EMU is definitely a value play, and it's a place that we also see some opportunity, just not as much as we are currently seeing in other regions of the world.
Linda: And with the emerging markets of scores. We know that China is the second largest economy in the whole world. They were the epicenter of the COVID. They started their shutdown quicker. They were more draconian, maybe got out of it quicker. And when you speak of emerging markets being towards the top of your favorite list right now. I suppose, it goes well beyond China as an investment, does it?
Martin: Yeah. That's a great point. So obviously China, particularly emerging markets context is now more than 40% of the emerging markets index. If you just think about that 10 years ago, it was less than 10. So big changes there. We have been slightly underweight China, but we have seen, as you mentioned again, this COVID kind of transition. They were the first in, first out, so to speak.
Martin: And so they recovered more quickly. Now we're seeing the rest of the world, particularly US recover. And then we're going to see Europe and the rest of the Latin American and those regions recover as well. But from the perspective of valuations growth and potential, we do see that probably other regions in Asia, so Southeast Asia, places like Singapore, places like Indonesia have some opportunity, but we are also as I mentioned earlier, focused on Latin America, obviously Brazil is having its issues with COVID right now, but we do feel that the longer-term consumption play, if you will and some of the other great stocks that we can find in those regions have upside. And so Latin America is kind of a delayed play, a recovery play relative to China, but yes, we're looking there as opposed to China right now.
Linda: Yeah. And of course, Martin, you remind us that when we speak of investing internationally, so many regions around the world and so many different kinds of opportunities, which we really do appreciate your expertise and also, you're a growth manager, forgive me, a growth manager. And I know here in the United States, and I think around the world, we're talking about a potential value rotation. But now I want to bring into our discussion, the exciting, innovative growth areas that many of us are talking about. The advances being made changing of our lives and electric vehicles in particular. And insofar as the growth in this area is concerned and where is it really strongest? If you were really, really wanting to invest in this brand new electric vehicle wave and the infrastructure surrounding its use, what are your thoughts there as it relates to international investing?
Martin: So obviously the US, particularly in the case of Tesla obviously really started the electric vehicle wave, if you will. But there are regulatory and other factors at play outside the US and really, if you look at the opportunity set, and we look at the entire supply chain. So when we visit our companies in Asia or in Europe, we are finding companies that really everything from mining to the components, to the battery, to the actual manufacturing of electric vehicles is really the whole continuum of the process that we're looking at. And so it's kind of the picks and shovels approach. And so, yes, Tesla is the big behemoth on the block. I can tell you a quick story. I was meeting with BMW management years ago, not one of our holdings. And interestingly enough, they were extraordinarily frightened by what was happening across the pond in the US with Tesla coming out of nowhere.
Martin: And really the automotive industry, which historically been dominated by industrial production, was now all of a sudden becoming more of a software oriented paradigm. And so, we noticed then that even in Europe, we had companies that were frightened of the potential future and the competition that was coming. And that competition now it's actually moved to Asia to some degree. Now it doesn't mean we can't find opportunities in Europe as well. I think a lot of the big automotive OEMs in Europe are doing very well to give you an example. But really in China and in Asia, particularly South Korea, we're starting to see companies that have a battery technology, that have provided a lot of the components and a lot of the inputs, if you will, for that longer-term EV trend that we are expecting to continue to move forward.
Martin: And so innovation is something that historically you wouldn't think of the emerging markets of being a big at the forefront of, but that's changed in the last five or 10 years. And just if you look at the emerging markets, generally, they used to be dominated by financials, by materials companies by utilities. And that has changed dramatically over the last 20 years. And so we're now seeing companies that really are at the innovation front. And so we obviously in America have to be much more competitive, but it is more of a global environment where it's the Europeans, the US and the Asians that are fighting for dominance in this particular industry.
Linda: So other areas of innovation that you might entice us out there in the world?
Martin: Obviously on the biotech side, there are also some interesting companies coming out of Asia. E-commerce, we know about the FAANGs in the US but there are some fairly large, bigger players outside the US whether they're Latin America. They're in Southeast Asia, they're in Asia, that have this e-commerce focus, they have a FinTech attached to it. And we've been invested for example, a company, believe it or not in Africa, that was really the forefront of basically FinTech pay technology from the telecommunications side. So it's really interesting how innovation has really come across the world to be globalized. It's not just coming out of Silicon Valley, obviously that really is still where it's important, but we are seeing really a broadening if you will, of innovation outside our borders.
Linda: Perfect. Remind us that the United States, isn't the only country in the world that can have good growth opportunities. And the FAANGs are not the only con companies in the world are they to be invested in for the exciting future that we have. So thank you, Martin. And thank you to our listeners. We look forward to you joining us again on the Federated Hermes Hear and Now Podcast. If you enjoyed this podcast, we invite you to subscribe to the Federated Hermes channel to get every here and now episode. Plus our other series, Amplified and Fundamentals for a global perspective on the issues, challenges, and trends shaping the investment landscape.
Disclosure: Views are as of 3/25/2021, and are subject to change based on market conditions and other factors. These views should not be construed as a recommendation for any specific security or sector. International investing involves special risks including currency risk, increased volatility, political risks, and differences in auditing and other financial standards. Prices of emerging markets securities can be significantly more volatile than the prices of securities in developed countries and currency risk and political risks are accentuated in emerging markets. FAANGs is the acronym for Facebook, Amazon, Apple, Netflix and Google aka Alphabet stocks. The Morgan Stanley Capital International (MSCI) Emerging Markets Index is an index used to measure equity market performance in global emerging markets. Due to their relatively high valuations, growth stocks are typically more volatile than value stocks. Value stocks may lag growth stocks in performance, particularly in late stages of a market advance. Past performance is no guarantee of future results. Federated Global Investment Management Corp. 21-30166 (4/21)