Current volatility strengthens case for international exposure

The U.S. may be the world’s leading economy, but it still pays to look further afield for additional valuation, cyclical and regulatory opportunities, says David Ragan, portfolio manager, global and international large-cap equities with Mawer Investment Management.

Speaking on the Soundbites podcast this week, Ragan said great companies can be found in Europe and Asia to offer much-needed diversification to U.S.-dominated portfolios.

“Outside of the U.S., you have other opportunities that have different valuations,” he said. “I think there’s very attractive opportunities that might not have the same cycle, the same volatility, as the U.S.”

Ragan said diversification is a smart play, given that international markets are resplendent with world-class names in a variety of sectors offering valuations as good as or better than the dominant names in the S&P 500.

“It’s not a [matter of investing in] one or the other. To me, it’s a question of both,” he said, adding that it is especially true in the current moment, when markets are being impacted by America’s polarized politics and unpredictable leadership.

“There is always something that is causing volatility in the market. It’s not usually the U.S. being the main source of volatility, but that’s what’s going on right now,” he said.

He pointed to opportunities in the financial sector — particularly in Japan, where interest rates are rising in an attempt to beat back a reflationary phase, and in India, where strong credit growth combined with good demographics is a tailwind for banks.

Sticking with the AI theme, he said most of the world-leading AI enablers are domiciled outside of the U.S.

“Taiwan Semiconductor makes every single Nvidia chip. They make the most advanced semiconductor on the planet,” he said. “All the memory producers — or most of the memory producers — are based outside of the U.S., in Korea. And then a lot of the equipment, it’s in Holland, or it’s in Japan. So, yeah, there’s a huge amount of enablers of the AI trend outside of the U.S.”

Names he likes

He is particularly impressed with Taiwan-based King Slide, which makes racks designed to hold electronic equipment like servers, switch hubs, keyboards, monitors and hard drives at the world’s growing number of data centres.

“In the newer editions of Nvidia servers, instead of one entity, [or eight or 16], there’s 30-plus different entities, weighing up to 200 kilograms,” he said. “So, there’s a lot more demand for rails in general. And these are very high value.”

He also likes South Korea-based SK Hynix, a dominant maker of high bandwidth memory.

“The memory industry is very volatile, so we really do have to watch for capital expenditures. But it’s almost like an oligopoly. They’re raising prices by hundreds of per cents over last year, and this is leading to massive profitability,” he said.

Outside of the AI theme, he’s taken by Wise Payments Ltd., which has become a dominant player in cross-border payments and currency conversion.

“They’ve gotten bigger and bigger,” he said. “And economies of scale have enabled them to pass back to the consumers, keeping their margins flat, where other companies might let their margins get wider and wider.”

Ragan said investors should always keep an eye on the U.S., but not be afraid to look further afield for new opportunities.

“There’s definitely still a lot of advantages in the U.S., but also there’s higher expectations, and there’s a lot of opportunities and things they just don’t do there. So, it’s mixed,” he said.

“The U.S. is still filled with amazing companies with great management teams, very, very entrepreneurial, very focused on shareholder wealth creation. But there’s companies like that around the world. And the valuations around the world can be a little bit better.”

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This article is part of the Soundbites program, sponsored by Canada Life. The article was written without sponsor input.