The case for international equities: Is the thesis unfolding?

We want to discuss this whole notion that is it finally time for international? You know, for a long time, people, I would say, have been under diversified and underexposed to international investing, and we've argued in the past that it makes strong valuation sense if there's been a huge divergence in performance between international and not international.

In fact, over the last ten years, the US S&P 500, has outperformed the international index by almost nine percent, per year, over the last decade. And we believe that this underperformance has somewhat been accentuated by the very narrow market structure of global equities and currency movements.

And our argument is that was and still is that this is simply unsustainable. Now, having this in the landscape and then we have to overlay, of course, the tariff situation, which has thrown kind of wrenches everywhere, not just in one place, but the tariff policy affects many things. If anything we may have more opportunities, especially when it comes to currency and some companies that have very, very US exposure.

So, at the end of the year, you had this massive, massive valuation gap open up, and as I would say, generally speaking, this has been a function of the weight of money going into some extremely narrow areas and you can see that the magnific magnificent seven stocks in the United States were more market cap, more than every single company in Europe. 

Now, the very first quarter of the year, look at that green. You finally have seen some movement. Our view is that this is just the beginning, that eventually money will flow to where there is a return calling for it, not just continuing on what is, has been a large momentum trade. So, in the first quarter, we’ve finally seen a break where international measurably outperformed the US and, in fact, the same thing we could talk about not just international versus the US, but within the US itself lower de-rated companies.

A lot of things are happening in Europe. Justin Hance, who co manages the international small cap product and covers Germany for us, could give us a little insight on what's happening in Europe that has given us a bit more enthusiasm for the region.

Thanks David. So, there is a lot happening in Europe and I think the most important, we would often get asked, you know, what, what, what are the catalysts? What, what could change in Europe that would, you know, cause this, this massive valuation discount that we've seen that David just talked about? What could make that start to reverse?

Certainly I think some benefits or some narrowing of, of conflict, a seized fire, an end of the war in Ukraine could be very beneficial. But I would argue that, that one of the most important catalysts has already happened, and that is what's happened in Germany. The elections held on February represent a really seismic change for Germany, which is the most important economy in Europe, and that the new government they just formed a new coalition. The new government led by Maersk is going to, create a number of conditions that we think are, are pro-business and pro-growth.

Most importantly, an end to German austerity so they've had a, a self-imposed German austerity program basically commonly known as the debt break, which limited the amount of debt that the German government could borrow in any given year or they'll the level of the budget deficit that they could have. That has been significantly altered such that spending can increase. This will specifically be targeted around infrastructure, defense spending and some other areas. And I think, you know, in conjunction with I think some of the pressure that's come from the United States government around defense spending in Europe, you'll see that not only in Germany but elsewhere across the rest of Europe as well. And I think, the spending that we're going to see in Germany will also put I think pressure and also, you know, I think stimulate some spending in other, another geographies in Europe as well. It's going to take a little bit of time for this to actually start to flow through financials and when we speak to our companies, we're probably talking about 2026 of some of this spending really starting to come through and impact demand for companies, products and services, but this is a very important development and change in the political landscape and and really the fiscal landscape in in Europe.

And so that would be the, the most important thing I think that's happened, as I said, you know, we've got tariffs, any I think resolution there would be very positive for anything around the war. But I also think, you know, it's not only Germany but overall, I think a broader pro Europe stance among the European economies, partially driven by some of the trade news recently, would be very positive from a, a growth standpoint, also.

I think these types of environments where with this tariff news or other things that are causing I think significant movement in, in equity prices creates opportunity for a long-term value investor like us.

So I don't think it should necessarily be surprising that we're seeing I think increased portfolio turnover during this time period because we've seen the opportunity to invest in high-quality businesses due to, you know, share price movements that, that maybe they, we always thought they were high-quality businesses, but we just couldn't quite get there on a discounter intrinsic value that we require. But around some of the volatility and concern around short-term earnings performance due to tariffs or slowing economic growth has opened up some of those opportunities for us. And so both in the international fund and also in the international small cap fund, you've seen increased portfolio activity.

Market disruption, volatility provides opportunity, if there's one thing, many of you have listened to me in the past, why don't you volatility is risk, weave you volatility's opportunity because prices are moving and vastly different directions and underlying intrinsic value. Value tends to be smooth and continuous of a company, it's just crazy how volatile prices could be and how often detached that price of volatility is to the underlying intrinsic value of a business.