Go back to the audio page.

**

Welcome to Soundbites – weekly insights on market trends, and investment strategies, brought to you by Investment Executive, and powered by Canada Life.

For today’s soundbites, we discuss international markets with Vivek Gandhi, a portfolio manager with Putnam Investments. We asked him how he thinks this year of recovery could play out for foreign markets, and we started by asking if he agrees this could be the year for international investments, as some market watchers have suggested.

Vivek Gandhi (VG): Absolutely, I agree. What we have this year is a demand-led recovery, which will benefit sectors like materials, industrials and financials more than others. Now if you look at the international markets, these sectors are a larger proportion of the market. The goods you’re going to consume, the things you’re going to buy, they’re mostly coming out of international markets. So, just that mix affect is going to benefit international markets.

Why he’s found valuations in Europe and Japan so attractive.

VG: These are the largest markets outside the U.S., so it’s natural that we’ll have larger exposure to that. And Europe is a great place to start. It has underperformed the U.S., both in terms of earnings and has de-rated. Its discount to the U.S. is now 20% on P/E basis, which is more than its usual discount. So, as the year progresses, and if my thesis comes true, you’ll have earnings recovery and you will also have some re-rating. So that will help Europe to outperform the U.S. And it’s the same case for Japan. So, no difference between these two markets.

What companies he particularly likes in these markets.

VG: Our top two companies in Japan would be Sony and Asahi Group Holdings. And in the U.K., it would be Prudential PLC and Diageo.

Sony is a global entertainment and gaming leader, number one in console gaming globally, #2 in music, and #3 in TV and movies.

Many may know Asahi Group from Asahi Super Dry beer. This company we believe will benefit as Covid cases retreat and we all have more social interactions. Now, Asahi has a 95% market share in Japan but over half of its sales come from markets outside Japan.

Prudential is a leading Asian life insurer with top-three positions in nine out of its 13 Asian markets. In Asia, its life-insurance penetration is 6% of U.K. levels and just 10% of U.S. levels, so as fast-growing middle class population comes into that bucket, we’ll have significant growth in earnings coming through.

And, finally, Diageo is a global spirits business which own brands like Johnnie Walker, Don Julio, Casamigos tequila, Tanqueray gin, Bailey liqueur, etc. This is a business with 40% exposure to the U.S., roughly 20% to Europe, and 20% to Asia. So, very globally diversified. It had a resilient performance and I think will benefit more as economies open and people have more social occasions to consume their products. So, I think I think this year will be good for them.

About the excitement of finding opportunities around the globe.

VG: From a stock picker’s perspective, the greatest benefit of international investing is the choice set. We have large number of companies and diversity of economies to choose from. So, our focus is to find high-quality businesses, regardless of where they are.

And finally, about finding the balance between growth and value investing.

VG: We don’t try to toggle or time the market. We aim for only diversified exposure to growth and value names. The key here is stock picking. Having said that, depending on the market condition, we may sometimes find better investments in certain sectors. And that will tilt the portfolio. So, currently given the recovery we’re seeing in economies, we’re finding better investment opportunities in industrials, financials, and materials. And that has tilted the portfolio to what I believe you mean by value. The reason I’m not a big fan of the growth-versus-value debate is the narrow definition which many people rely upon. So, many quant screens use low price-to-book to define value, which we believe penalizes companies that have high return on capital employed, have a capital- or asset-light model, or are building intangibles such as brand or IP [intellectual property]. To penalize these companies because they’re high price-to-book just doesn’t seem right. So, we choose to focus on the quality dimension, which we think works better through the economic cycle.

**

Well, those are today’s Soundbites, brought to you by Investment Executive, and powered by Canada Life.

Our thanks again to Vivek Gandhi, portfolio manager with Putnam Investments.

Join us every Wednesday at InvestmentExecutive.com, where you can sign up for our AM newsletter and never miss another Soundbite.

Thanks for listening.

**

Go back to the audio page.