May 16, 2025 • 37 mins
Sarah Ketterer, chief executive of Causeway Capital Management, which has over $55 billion in assets under management. joins this week’s Merryn Talks Money to discuss why stocks have rebounded from last month’s bloodbath, and why the US market’s long-held dominance is nevertheless shifting as investors increasingly seek value beyond its borders—in Europe, Japan and South Korea.
See omnystudio.com/listener for privacy information.
Mark as Played
Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Speaker 1 (00:02):
Bloomberg Audio Studios, Podcasts, radio News.
Speaker 2 (00:17):
Welcome to Merrin Talks Money, the podcast in which people
who know the markets explain the markets.
Speaker 3 (00:22):
I'm merrin'sums at Web. Now.
Speaker 2 (00:24):
Things aren't quite as they were in the US. The
spell of exceptionalism is broken, and everyone's looking around the
little if not the US web does that there is
value all over the place for those that care to
look for it, perhaps in Japan, perhaps in Korea, and
perhaps in Europe, which is picking up the fiscal stimulus
bat and the US looks to be dropping. So to
unpack all of this, I am joined by Sarah Catter,
(00:46):
a chief executive officer of Causeway Capital Management. That's fifty
five point two billion dollars in assets under management. She
also serves as a portfolio manager for the firm's fundamental strategies.
Sarah co found of Causeway Capital Management in two thousand
and one and has decades of experience managing international and
global value portfolios.
Speaker 3 (01:05):
Sarah, it is great to have you on. Thank you
for having me, Maren.
Speaker 2 (01:10):
Now, we've got quite a lot to get through. Things
seem to change every minute these days. It's hard to
keep a handle on what's important and what's not important
and where.
Speaker 3 (01:17):
Things might or might not go.
Speaker 2 (01:18):
So why don't we start by looking at the US
equity market. John, my colleague here at Blmberg and I.
We look at this all the time, and we keep going.
This is absolutely extraordinary. Everything that's happened since the election,
everything that's happened with the tariff conversations, with the mutterings,
bet recession, no recession, et cetera, et cetera, all the kaos,
(01:39):
all the difficulties, the insanely high valuations, what look like
insanely high valuations to us, and yet in the end
the market is pretty much backward it was. Does that
make sense to you, because it doesn't make.
Speaker 3 (01:51):
Sense to us.
Speaker 4 (01:52):
It does make sense, Maren, because there is still quite
a bit of money looking for a home. If you
look at the Chicago Fed Conditions Index, something that we
at Causeway watch, they appear reasonably loose. In other words,
credit is still reasonably abundant. People have money to put
to work, an aging population that developed world, they need
(02:16):
to continue to invest. So none of this surprises me.
If we did have persistently higher tariffs and there was
a trade embargoed with China, markets certainly in my view,
would not have recovered the way they did.
Speaker 2 (02:30):
Okay, so there are circumstances under which this extraordinary performance
of the US market might come to an end. I mean,
you tend to be quite valuation orientated, right, That's something
that you talk about a lot and think about. So
it must be extraordinary for you to be operating inside
a market that consistently, consistently destroys any sense of value investing.
Speaker 4 (02:52):
Well, that's a that's pretty harsh indictment. We at causeway
we invest both quantity and fundamentally. In the fundamental side,
we have much greater emphasis outside the US. They may
do within the US, but in our global equity portfolios
where underweight the US market versus the indices.
Speaker 3 (03:12):
And that's from the bottom up.
Speaker 4 (03:13):
That's from finding more non US companies that meet our
value criteria. I have gone so far with clients, and
our clients are predominantly institutions, mostly in North America, and
I say to them, non US, particularly non US developed
equities are value relative to the US. However, that doesn't
(03:35):
make them necessarily superior. Underneath that value umbrella, it's really
important for us to look for companies that are well
positioned competitively that have financial strength or are moving toward
much improved balance sheet leverage.
Speaker 3 (03:53):
And they are they.
Speaker 4 (03:55):
Have the ability or soon we'll have the ability to
return capital to shareholders. I couldn't say this without being
booed out of the room during the long period of
zero or negative interest rates post the Global Financial Crisis
and post COVID. But we're in a normal rate environment
and that makes value really interesting because these stocks where
(04:20):
the market is underestimated their earning potential and where there
can be returns of capital in the form of buybacks
or dividends, that's extremely valuable. So we're more excited about
the value part of our business in fundamental research and
portfolio management than we've ever been.
Speaker 3 (04:38):
Okay, that's interesting.
Speaker 2 (04:39):
Let's just go back a bit and maybe you could explain,
to explain to our listeners why this is all about
interest rates. It's something we've talked about a lot on
the podcast, but I'd love to hear your take on that.
Why the interest rates that change the environment from growth
to value being interesting.
Speaker 3 (04:56):
Think about a stock. What is a stock? What's it worth?
Speaker 4 (05:00):
It's worth the present value of all the cash that
can generate into perpetuity. So that's forever hard to imagine
discounted to present, and the discount rate on that long
stream of cash flow when it's near zero, that means
investors are willing to pay anything for that stream of cash.
In fact, investors at a zero rate are indifferent between
(05:24):
cash today or cash tomorrow. That a specuative company that
is promising huge returns sometime in the future is worth
taking a gamble on because there's no cost of money.
When rates rise, especially real interest rates are firmly positive,
then there is a significant cost of money. In other words,
(05:46):
you could put your money in a government deposit, you
could be in a money market fund. You could get
a risk free rate that is just above inflation, so
even after tax, maybe you're above even, but your money's
not shrinking. Or you could own equities, and in our
view that that higher discount rate means there is there
(06:10):
are only certain valuation multiples that make sense. And if
the and if the valuation multiples like a price to
earnings multiple or price to cash flow, if it gets
too high, you have overpaid, and so you paid too
much for that stream of cash, and therefore you're very
unlikely to get your money back.
Speaker 2 (06:29):
Okay, so if you live at it like that, an
overload of the American market is overvalued. Yeah, expense to
the market that you wouldn't necessarily want to invest in. Yes,
there are there are expensive parts of the US market,
and there are more growth stocks, there's more technology exposure,
(06:49):
much more from a sector basis in the US than
outside the US, to the tune of like two and
a half times. Okay, So when you take the idea
to your clients that maybe it is time to move
a significant amounts of money out of the US into
more value orientated markets.
Speaker 3 (07:04):
What's the reaction.
Speaker 2 (07:05):
You're getting a different reaction to now than you might
have gone three four years ago, two years ago, one
year ago.
Speaker 4 (07:11):
We are getting a different reaction. A part of that
is the spell is broken. The long period of dollar
ascendency has turned. The US dollars lost some of its strength,
so investors aren't as concerned they'll be this constant if
they're dollar based currency headwind. They're looking for a tailwind now.
(07:31):
But also they recognize they need to be diversified. This
is a watchword of investing, whether it be for individuals
or institutions. And becoming over index to the US market
having too large an exposure just due to the letting
it ride having maybe not rebalanced back to the anacid
allocation that includes non US equities. I think they're nervous
(07:56):
about that now and investors are attempting now to get
more non US So it's not a stampede, but we
definitely see this trend.
Speaker 2 (08:05):
It's interesting, this idea, this bell is broken, isn't it
That even though the US marketer is really still performing
remarkably well, there is a sense that it's no longer
in absolutely longer given. It's no longer entirely reasonable to
have the majority of your money tied up in the US.
I mean, we've been looking at the passive investors and
retail investors all around the world are just buying into
(08:27):
global index funds, or even worse, just US index funds,
and even if they're in global, they'll have six seventy
percent of their money in one market. And it's hard
for people to turn from saying that that isn't really
the type of diversification that we've meant historically.
Speaker 4 (08:42):
And there are catalysts for Europe in particular that we
haven't seen in a long time. And some of this
is a byproduct of the political, diplomatic and terror related
stresses put on Europe, but needing to spend on defense
several percentage points more in terms of GDP. That's hundreds
(09:03):
of billions of euros of additional spending infrastructure. Having a
need now urgently for a harmonized EU capital market. All
of this speaks to the potential for Europe to become
a more attractive place for capital and even if it
isn't all realized, just some of it at the margin
(09:25):
that will help close that valuation gap, not close it completely,
but just narrow it from this extremely expensive US market
versus rest of world, in particular Europe in the UK.
Speaker 2 (09:39):
Yeah, so a big part of this is really about
the fiscal shift. So if in the US stimulus has
really reached something a limited at this point and that's
much discussed, whereas in Europe the space for fiscal stimulus
and that's going to drive this coming together evaluations.
Speaker 3 (09:55):
Yeah, fiscal rope in the US.
Speaker 4 (09:57):
My colleagues and I Cosway looked at to breakdown of
what created such a massive performance increase premium US versus
Let's just take Europe over the last decade and yes,
much greater sales growth in the US was a large contributor,
but the second largest contributor was multiple appreciation. In other words,
(10:18):
multiples just rose in the US. And we think a
good part of this is a function of a lot
of fiscal stimulus, and that stimulus now has to be
curtailed because of the US bond market is going to
constrain the politician's ability to keep spending with abandon.
Speaker 2 (10:38):
And let's stick with America for a moment. Do you
see that the new tariff regime, Not that we're entirely
sure exactly what it's going to be after this little
truth in ninety days, but we still don't know what
we are obviously, But do you see any sense that
that might end up being good for parts of US business?
That we may see this manufacturing renaissance which may change
(10:59):
the way the enemy works and hence the way the
market can be valued.
Speaker 4 (11:02):
From a causeway research perspective, we think it's unlikely. At
the margin, maybe more auto manufacturing, because that's one area
where President Trump is very keen to ensure there's more onshoring,
but there are low end products from just about everything
(11:23):
in the electronics components, consumer goods. Think about toys, for example, textiles,
they don't belong in a US manufacturing context unless fully automated.
And who's going to pay that upfront bill for those
automated factories? The returns don't make sense for companies, and
(11:47):
without some sort of bizarre government subsidy, we think it's
very unlikely. So those maybe some of that will move
out of China, as it already has, but it will
go to friendly countries and they will and it won't
be on you in US soil. We just can't see
a mannerfacturing renaissance. What we'd like to see is an
(12:08):
education renaissance, but that hasn't been mentioned yet.
Speaker 3 (12:11):
All right, well, let's have a look then at Europe.
Speaker 2 (12:14):
And in one of the pieces that you wrote recently,
you've got a great shot which shows the extent of
Germany's fiscal boost and it shows that if it works
out as expected at the moment, it would be a
bigger physical booth than the Marshall Plan, a bigger physical
boots than the reunification of Germany, etc.
Speaker 3 (12:30):
I mean as significantly bigger.
Speaker 2 (12:32):
Actually, And on your chart you've got that fairly clearly
divided between infrastructure and defense. So if you were investing
into Europe, you are slee Are those the sectors that
you're looking at.
Speaker 4 (12:45):
Most of the European listed defense stocks started moving last
year and they've had a significant run, so the market's
already gotten there. But the defense spending leads to a
whole ecosystem of stimulus in Europe. And one of the
companies that we like very much is in green transportation.
(13:05):
It's Alstam. They're the France listed world's largest manufacturer of
rail a rail equipment and signaling. They make the bulk
of their profits from services, in other words, servicing and
maintaining and upgrading these rail systems, whether they be rails
or subways or subway cars. And this is a company
(13:25):
that governments around the world and as well as in Europe,
recognizing more urbanization, will be spending on improving public transport,
long term contracts, very long term customers, well positioned. They
made some unfortunate acquisitions in the past which created some
contracts that were mispriced, and they management team has been upgraded.
(13:49):
This is just the sort of stock we like. At Causeway,
where investors had lost interests they thought the business wouldn't
do well, particularly given inflation and the cost of their contracts,
but we saw a management team capable of creating an
earnings turnaround and thus more cashful for shareholders. And it's
(14:12):
a it's a stock very emblematic of what I think
of as sort of the new Europe, where efficiency is
the watchword, corporate managements know they need to deliver for shareholders.
And then that's all very synergistic with ensuring the prosperity
of Europe and beyond.
Speaker 2 (14:29):
Yeah, and when we look at at infrastructure, I was
at a defense conference last week and a lot of
the discussion was around how infrastructure is effectively defense to
a degree, and that if you don't have a national
grid that works, you kind of stuffed before you even begin, right,
if you can't keep the electricity on in Fain and
Buttugal and France, then deciding from a pretty lousy base.
(14:51):
There's this blur between what is defense and what is
infrastructures that we would expect an awful lot of money
to go into, for example, electricity grids.
Speaker 3 (14:59):
Oh yes, across Europe, oh.
Speaker 4 (15:00):
Oh, very definitely already has and will continue to do so,
and rate bases will reflect that. But one area you
haven't mentioned that it's also very I think is very
interesting is how will in an aging population that boost
in manufacturing and all the stimulus, how will it translate
into output? And that's through automation. And although there are
(15:25):
interesting there are very well placed automation companies like parts
of Zeman's in Europe. The ones that are the most
undervalued and we think the greatest upside are actually in Japan,
companies like Panic in robotics or SMC in pneumatic equipment.
This is very I can see how people would be
(15:47):
board stiff listening to this, but this these are the
building blocks of manufacturing and of and of ensuring that
for example, the automotive industry or electronics industry, whatever it
is that where Europe or the US needs to onshore
for national security reasons that automation is essential for productivity.
Speaker 3 (16:09):
It's interesting, isn't it.
Speaker 2 (16:10):
There's a big divergence between the levels of robotics in
different economies. I mean, the UK were absolutely useless. We
have one of the lowest ratios of robotics to workers
of any developed countries. But some European countries are much
better at than we are.
Speaker 4 (16:25):
But the UK will likely catch up and the AI
enabled robotics will transform how products are manufactured and for
the better. That should ensure that we can, even with
a limited labor force, create the output necessary for GDP growth.
Speaker 2 (16:47):
So Japan is already responding to this demographic crisis that
we're seeing across the cross the rest of the Western world,
and they've done that to a large degree with much
more in the way of robotics, automation, etc. Than we
use elsewhere. And that's been relatively sex that's full in
the GDP ahead in particular hasn't follen or come off
in the way that many expected.
Speaker 3 (17:05):
So we have an example to follow.
Speaker 4 (17:06):
Yes, yes, their demographic situation is more dire than that
of just about anywhere else, but I would agree with that,
and that technology is homegrown for them.
Speaker 3 (17:18):
All the good.
Speaker 2 (17:18):
Robotics companies outside Japan that you're interested in.
Speaker 4 (17:21):
There are good ones that values are really in Japan.
And this has part lead to do with the fact
that the end had been extremely the en it's been
very volatile and now settling around one hundred and forty
five yen to the dollar. I think that investors are
concerned that the end may con might go on another
(17:42):
bout of appreciation which would be somewhat detrimental for these companies.
They do slightly better in a weaker yen environment.
Speaker 2 (17:49):
Do you have other investments in Japan with terrib qing one,
we're always talking about what amazing value it isn't and
coblitely being mildly disappointed by it.
Speaker 4 (17:58):
Amongst us c of what i'd call maybe mediocre corporate
governance type companies, there are some extraordinary world champions companies
like Murata in multi layer ceramic capacitors. They are the
best in the business, just the way SMC is the
best in pneumatic equipment. Imagine being number one across your
different industry verticals and marauder trades is if it's just
(18:23):
it's a cyclical aticyclical low so low in price to
book terms, low and uh in prospective pe multiple terms,
because investors haven't seen the kind of smartphone sales for example,
that would that would propel this stock forward. But what
we do know is that edge devices are coming, and
that our device is whether it be p seeds or
(18:44):
smartphones or any other type of device than wearables well
glasses for example, they'll be AI enabled. This is all
inevitable and the key for US at causeway is, find
these great companies when they're at sickle lows, be prepared
to own them for several quarters while the market digests
(19:07):
the disappointing news, and then then have a large position
when the cycle turns upward.
Speaker 2 (19:14):
Do you have any interest in the UK market? Do
you find you're talking about finding innovative companies, interesting companies,
best in class companies When you look at the UK
you can definitely find.
Speaker 3 (19:26):
Value here, yes, But can you find that kind of.
Speaker 4 (19:30):
Value companies in the throes of operational restructuring? We can
find that, and I consider that to be derivative innovation
because it requires tremendous discipline, requires management being able to
extract something from the business that no one else has
done before. And the best example I can give is
the UK aerospace company Rolls Royce at near death in
(19:54):
early twenty twenty during covid is wide body aircraft engines
that they manufacture. Planes were grounded, no flying hours or
little to know. The cash flow went into the red
and the company had to do an enormous rights issue.
Speaker 3 (20:10):
It looked very bleak, but a CEO upgrade.
Speaker 4 (20:14):
And a transformation of that business into this world class
company that's in a duopoly with ge and what we've
seen out of that is cash flow generation galore. And
that's a testament to the governance to the chairwoman need
a freu and a determination to get the right person
in the top job. We like to see that, and
(20:37):
when we see it, we are backing it.
Speaker 3 (20:39):
Are you still backing if you still invested in real road? Yes,
we are.
Speaker 4 (20:42):
How often does a value investor, which we are in
our global equity portfolio, how often do we get access
to a duopoly? What does it mean to be in
in a monopolist or a duopolist. It means you have
either none or one competitor, and that translates into pricing power.
Being able to go back to your customers and say
(21:05):
we're raising price and have no pushback at all. Rare
and in this environment.
Speaker 3 (21:11):
We like that.
Speaker 4 (21:12):
We like to see and that's why I mentioned Alstam
for example, being excellent at what they do in rail
cars and rail signaling gives them that pricing power and
having very few competitors, but roles having just one major competitor,
and wide body aircraft engines they're in a they're in
the catbird seat.
Speaker 2 (21:32):
If you look at things like that, But you're also
a valuation driven What is the signal for you, even
with an amazing company like that, to say, Okay, you're
producing vast and masive cash, you're a dua believe you
have pricing power. We love that, but now you're too expensive.
Speaker 3 (21:49):
Where are your parameter?
Speaker 4 (21:51):
So we work on a risk adjusted return basis, and
what that means is that for every stock that we
consider for our global Portfoliolo, we Causeway portfolio managers and
analysts and they're about twenty seven of us. We determine
the two year price target for the stock, where should
(22:13):
that stock trade two years from now based on the
as we discussed its earnings in cash flow, and then
we risk adjust that So using our quantitative multi factor
risk model, which sounds very complicated and isn't, we're determining
the incremental or additional amount of volatility that stock will
(22:33):
add to our existing portfolio if we actually bought more
of it. And some stocks add to risks we already have,
so they are very high risk and therefore on a
risk adjusted return basis, the risk will will make them
less attractive. And then there are other stocks that may
have very high returns but have very modest amounts of
(22:56):
additional risk that they pose to the portfolio, and they
will look very attractive. So we rank all these stocks.
We rank about one hundred and fifty stocks globally, the
ones we're most interested in on risk adjusted return, and
the highest ranking stocks the top fifty are typically well
(23:17):
represented in the portfolio, and the higher they rank, the
more we generally own. And as they do well, as
the price of the stock rises, unless we're raising our
to year price target, that means the prospective return is diminishing.
So the stock is descending, it's falling in that ranking,
and as it does, I'm finally answering your question, that's
(23:41):
when we sell, or would trim the stock at least,
if not sell out completely, and then reinvest the proceeds
those sell proceeds back into you guessed it, the highest
ranking stocks. This discipline process ensures there are no politics
in our approach. There's no seniority, there's no committee myopia.
(24:03):
It's all about what the stock can deliver risk adjusted
versus all the other candidates we have.
Speaker 3 (24:08):
That is a bottom up process. Okay, interesting, he did
answer my question. That was a great answer. Really interesting.
Speaker 2 (24:15):
Take you, but Listen, all the companies that we've talked
about so far have been very big. We've talked about
large caps, but I know you also have an interest
in smaller companies, which of course as well if you
really are a value investor. There's a lot of value
knocking around in small caps globally, even in the US.
There's a lot of value. That certainly is in the
UK where our smaller and midsized companies are on their
(24:36):
knees valuation wise.
Speaker 3 (24:39):
Tell me what your thoughts are there. Well, if they're
very small, we stay away.
Speaker 4 (24:43):
We need at least a billion US dollars in market cap,
and that would be an all free float.
Speaker 3 (24:49):
In other words, there can't be a large insider holding.
Speaker 4 (24:51):
There needs to be lots of trading liquidity, and I'd
say we're more comfortable in the three billion dollar and
higher level, where we have the ease and liquidity of
entering the stock and exiting as we see fit. In
that what I think of is more MidCap area. There
are plenty of stocks, there are no shortage of them.
(25:14):
The Smiths Group here in the UK is one we
like very much, or also in the UK SSP group,
wh Smith another one that when cause we gets excited
about these stocks. We end up owning five six, seven, eight,
nine ten percent of the outstanding shares and you can
understand our commitment because that means that we're in It's
(25:38):
going to be quite difficult to extricate our clients if.
Speaker 3 (25:41):
We called it wrong.
Speaker 4 (25:42):
So are the lesser liquid stock. The smaller it is,
the more we need to be absolutely certain that we
are We've made the right decision, and we believe that
the management team can affect the operational turnaround, the improvement
in earnings and cash that that we suggest that they should.
Speaker 3 (26:04):
What's the case for wh Smith wh Smith this morning? Yeah?
Speaker 4 (26:12):
Travelings, Well, travel is the case. And of all the
areas of consumer discretionary spend, travel is one that seems
to be most resilient and with travel comes expenditures. A
cousin to that is another stock we like very much,
(26:33):
List in the UK and also in the US. But
Panamanian Carnival Cruise. This is travel on steroids because this
is the world's largest cruise company fourteen million passengers last
year and they are now bringing passengers to their own
private islands to keep spending. So travel and spending go
(26:56):
hand in hand. And if you have a captive customers
you do with WHMI given their franchises and in airports
and train stations, or you do with Carnival, you've got
this cash flow machine. Carnival hasn't been a debt, but
they're able. They've already been announced some significant refinancing and
the trends look really good. They're eighty percent booked through
(27:18):
the end of twenty twenty five. That's a high level
of confidence even as we started this conversation in a
world of tariff uncertainty.
Speaker 2 (27:29):
W A. Smith also fits into your monopoly duopoly idea,
doesn't it, And that it's pretty much the only place
you can buy a newspaper at the app works in
the UK.
Speaker 3 (27:37):
There are no other options. That's it.
Speaker 2 (27:40):
The only place to buy your every thrillers and your
overpriced water and your sandwich, et cetera.
Speaker 3 (27:45):
It is W A. Smith. Carnival has competition.
Speaker 4 (27:48):
Well not really though I would really back on that Carnival.
You're on those ships, there is no competition. There is
nowhere to go. And when you're on their own private
island like Carnival with their launching in July, it's all theirs.
So no In fact, they have created. Once you have
bought that ticket and step more.
Speaker 3 (28:09):
Go on another ship. You can go on another ship.
There quite a few crews go not.
Speaker 4 (28:12):
Once you've once you've embarked, you have no choice. You're stuck.
Where is Carnival Cave? This is fascinating. I did not
know celebration. They're all these private islands are in the Bahamas.
Speaker 2 (28:23):
So you go there in the cruise ship, you anchor
off the private island. You spend, but you don't stay
on the private island. You spend more of your money
on the private extent. You get back on the ship
and off you go again.
Speaker 4 (28:33):
Yes, you go and spend money on the private island,
enjoying yourself with kayaking and water slides and I think
a tremendous amount of alcohol. Then you get back on
the ship and spend some more.
Speaker 2 (28:45):
And is this all part of the story about I mean,
I've been writing a bit about the travel industry and
the rise in the amount of money that people are
prepared to spend on travel, which is maybe partly about
COVID and people thinking, well, now I wan't to e
experience as opposed to stuff, but also partly and this
brings us back to the conversation we had earlier about
the present value of cash, but also the present value
(29:10):
of an experience is hugely enhanced by social media because
the experience has more status value out with the actual experience,
and you can keep it rolling for a long time,
so it has a value that isn't immediate and it's
just different and that gives it more value. Is that
part of that whole vibe.
Speaker 4 (29:30):
Yes, the baby boomers supposedly aren't this experience focused, but
we've seen indications to the contrary, and travel dollars leisure,
travel dollars to cruises seems to be very heavily skewed
toward that demographic.
Speaker 3 (29:44):
It's not the young.
Speaker 2 (29:45):
I thought that what we were saying was a rise
in younger people spending more money than you would expect
on vacation experience.
Speaker 4 (29:53):
Well, at the margin, there are more than you'd expect,
but it's still dominated by the retiree set. To your point,
they're very keen on experiences and are willing to spend
there in ways they wouldn't spend in any other type
of leisure.
Speaker 3 (30:09):
What about what about emerging markets.
Speaker 2 (30:12):
We've mainly talked about development markets across across this gal a.
There emerging markets where you up finding interesting stocks that
maybe Asia, maybe Latin America.
Speaker 4 (30:20):
We have a separate quantitabily managed emerging market fund that
is overweight Asia at present and even overweight China and
invests across the whole array of emerging markets. And then
within our global fundamental strategy we have some exposure. The
one emerging market that actually really should be classified as
(30:42):
developed where we have the most is likely South Korea,
and that has a lot to do with under evaluation
and the star performer there is some such Electronics, the
world's leader in memory semiconductors. They've a big consumer electronics business,
displays business, but Samsung trades like a cyclical memory semiconductor stock.
(31:07):
So when the memory semiconductor environment is oversupplied and prices
are falling faster than usual, the stock price tanks, and
it's in that lower level evaluation now. But what we know,
and it's Brian Chow who heads up our technology research
A Causeway says over and over again to the team,
(31:29):
compute equals memory. In other words, the more compute needed,
and every enterprise we talk to is adding compute capability.
They're moving their it to the cloud. They need to
be able to take all the data they have and
be able to extract important signals from that. They're using
AI ways they never did before. And that's just the start.
(31:53):
So the demand for memory and it'll be come from
s k Heinex, from then from Micron. In the US,
these three giants control the bulk of the memory semiconductor market.
This to us is just another example of the market saying, oh,
short term cycles down, we don't want it, and we
causeways say we want as much as we can get
(32:13):
because we know when the cycle turns up we will
have a very low entry price and therefore tremendous returns.
Speaker 3 (32:21):
So you use to see it c polygopoly.
Speaker 4 (32:24):
Yes, there's yes, this one in an oligopoly well put,
and it doesn't necessarily lead to tremendous pricing power, but
it does. There is a moat, and the moat is
the incredible cost of building these the fabs in order
to manufacture these semiconductors three billion dollars each or something
(32:45):
of that magnitude.
Speaker 3 (32:46):
The hell of a barrier to entry.
Speaker 2 (32:47):
Yes, do you hold any commodities companies any minus anything
like that?
Speaker 4 (32:53):
We do our sol or matol in steel. Why would
anybody buy steel in the Chinese they're dumping it? In
their thesis is they can't. And that's one thing that's
coming out of this tariff Breujaha, which is steel simply
can't be dumped on any The US in Europe are
going to be very careful to ensure that that isn't happening.
(33:15):
And you can't tranship it through Vietnam. It's still steel.
It can't be hidden our salaries to have a terrible
bound sheet now it's absolutely fantastics. They have a lot
of financial strength, so they have the ability to weather
all sorts of storms. But the need for steel is inexorable.
And maybe no big huge housing boom, but it doesn't matter.
(33:39):
And the surplus coming out of China, if it's controlled,
means that pricing should be better. So there's one. And
we also like Smurf at West Rock and Packaging, just
very very well managed business. And the concern about tariffs
and less shipments for linerboard container board demand would drop,
(34:01):
we consider that to be temporary and that ultimately e
commerce is a trend that doesn't stop and there will
be more need for their product. So we'll go for
a commodity company, if a very well managed b we
think the commodity itself has a reasonably rosy future, and
the balance sheet is excellent because commodity stocks can be volatile,
(34:24):
and the last thing you want is financial leverage along
with operating leverage.
Speaker 3 (34:30):
Okay, brilliant, that's a great one. Thank you for that. Listen.
I've taken up an overload of the other time.
Speaker 2 (34:35):
So I just got a couple of quick questions that
I kind of ask everyone at the end, and if
you don't have an answer, absolutely fine, Okay, But I
wonder if I were to offer you a choice of
bitcoin of gold, which you might take.
Speaker 4 (34:52):
I own some bitcoin and I don't own any gold,
but I own bitcoin because my kids shame me into it.
Speaker 3 (35:02):
What can we do to shame you into buying some gold.
Speaker 4 (35:06):
I think if the gold price sagged again, I might
consider it, But given how strong it's been, and I
understand in part the reasons, and we can see that
there's central bank buying, there's individual buying. There's a lot
of concern about about fiat currency being oversupplied, and that's
all very legitimate, and that's in part what drives the
(35:29):
demand for cryptocurrencies, especially the leaders like bitcoin. But at
least with crypto, there's you get to partake in it,
an exciting future that involves blockchain. Gold is just a
lump and I just have very little to say about
gold except without earnings and without cash flow, I'm less interested.
Speaker 2 (35:51):
Yeah, it's just not an asset for you. And what
are you reading at the moment? Financial and non financial?
Speaker 3 (35:56):
We don't care we this episode.
Speaker 4 (35:58):
I think lately it's been mostly posts that I've enjoyed
because I'm trying to get more technologically savvy, listening to
Mark Zuckerberg talk about Lama models.
Speaker 2 (36:10):
But.
Speaker 4 (36:12):
Get my head around what was going on in the
US administration. So I jd Vance's book. I read that
it helped me understand his background and maybe how the
perspective he comes from.
Speaker 3 (36:29):
He'll billy elogy.
Speaker 4 (36:30):
But since then, I think I've just cooled on books
and I'm more podcast focused.
Speaker 2 (36:36):
Okay, good, that's what I like to hear. Anyway, I
don't know how publishers would like to hear that. I'm
very keen to hear that about you and podcasts. Thank
you so much for doing us today. That was really
interesting and I think incredibly useful.
Speaker 3 (36:47):
Thank you, Thank you.
Speaker 2 (36:54):
Thanks for listening to this week's maryn Talks Money. If
you like us to rate, review and subscribe wherever you
listen to podcasts, and keep sending your questions or comments
to Merin Money at Bloomberg dot net. You can also
follow me and John on Twitter or x. I'm Marinus
w and John is John Underscore Stepic. This episode was
hosted by Me Maren Sumset Web. It was produced by
Samasadi Moses andam and tala Amadi. Sound designed by Blake
(37:16):
Maples and special thanks of cost Sarah catter Up
Bloomberg Audio Studios, Podcasts, radio News.
Speaker 2 (00:17):
Welcome to Merrin Talks Money, the podcast in which people
who know the markets explain the markets.
Speaker 3 (00:22):
I'm merrin'sums at Web. Now.
Speaker 2 (00:24):
Things aren't quite as they were in the US. The
spell of exceptionalism is broken, and everyone's looking around the
little if not the US web does that there is
value all over the place for those that care to
look for it, perhaps in Japan, perhaps in Korea, and
perhaps in Europe, which is picking up the fiscal stimulus
bat and the US looks to be dropping. So to
unpack all of this, I am joined by Sarah Catter,
(00:46):
a chief executive officer of Causeway Capital Management. That's fifty
five point two billion dollars in assets under management. She
also serves as a portfolio manager for the firm's fundamental strategies.
Sarah co found of Causeway Capital Management in two thousand
and one and has decades of experience managing international and
global value portfolios.
Speaker 3 (01:05):
Sarah, it is great to have you on. Thank you
for having me, Maren.
Speaker 2 (01:10):
Now, we've got quite a lot to get through. Things
seem to change every minute these days. It's hard to
keep a handle on what's important and what's not important
and where.
Speaker 3 (01:17):
Things might or might not go.
Speaker 2 (01:18):
So why don't we start by looking at the US
equity market. John, my colleague here at Blmberg and I.
We look at this all the time, and we keep going.
This is absolutely extraordinary. Everything that's happened since the election,
everything that's happened with the tariff conversations, with the mutterings,
bet recession, no recession, et cetera, et cetera, all the kaos,
(01:39):
all the difficulties, the insanely high valuations, what look like
insanely high valuations to us, and yet in the end
the market is pretty much backward it was. Does that
make sense to you, because it doesn't make.
Speaker 3 (01:51):
Sense to us.
Speaker 4 (01:52):
It does make sense, Maren, because there is still quite
a bit of money looking for a home. If you
look at the Chicago Fed Conditions Index, something that we
at Causeway watch, they appear reasonably loose. In other words,
credit is still reasonably abundant. People have money to put
to work, an aging population that developed world, they need
(02:16):
to continue to invest. So none of this surprises me.
If we did have persistently higher tariffs and there was
a trade embargoed with China, markets certainly in my view,
would not have recovered the way they did.
Speaker 2 (02:30):
Okay, so there are circumstances under which this extraordinary performance
of the US market might come to an end. I mean,
you tend to be quite valuation orientated, right, That's something
that you talk about a lot and think about. So
it must be extraordinary for you to be operating inside
a market that consistently, consistently destroys any sense of value investing.
Speaker 4 (02:52):
Well, that's a that's pretty harsh indictment. We at causeway
we invest both quantity and fundamentally. In the fundamental side,
we have much greater emphasis outside the US. They may
do within the US, but in our global equity portfolios
where underweight the US market versus the indices.
Speaker 3 (03:12):
And that's from the bottom up.
Speaker 4 (03:13):
That's from finding more non US companies that meet our
value criteria. I have gone so far with clients, and
our clients are predominantly institutions, mostly in North America, and
I say to them, non US, particularly non US developed
equities are value relative to the US. However, that doesn't
(03:35):
make them necessarily superior. Underneath that value umbrella, it's really
important for us to look for companies that are well
positioned competitively that have financial strength or are moving toward
much improved balance sheet leverage.
Speaker 3 (03:53):
And they are they.
Speaker 4 (03:55):
Have the ability or soon we'll have the ability to
return capital to shareholders. I couldn't say this without being
booed out of the room during the long period of
zero or negative interest rates post the Global Financial Crisis
and post COVID. But we're in a normal rate environment
and that makes value really interesting because these stocks where
(04:20):
the market is underestimated their earning potential and where there
can be returns of capital in the form of buybacks
or dividends, that's extremely valuable. So we're more excited about
the value part of our business in fundamental research and
portfolio management than we've ever been.
Speaker 3 (04:38):
Okay, that's interesting.
Speaker 2 (04:39):
Let's just go back a bit and maybe you could explain,
to explain to our listeners why this is all about
interest rates. It's something we've talked about a lot on
the podcast, but I'd love to hear your take on that.
Why the interest rates that change the environment from growth
to value being interesting.
Speaker 3 (04:56):
Think about a stock. What is a stock? What's it worth?
Speaker 4 (05:00):
It's worth the present value of all the cash that
can generate into perpetuity. So that's forever hard to imagine
discounted to present, and the discount rate on that long
stream of cash flow when it's near zero, that means
investors are willing to pay anything for that stream of cash.
In fact, investors at a zero rate are indifferent between
(05:24):
cash today or cash tomorrow. That a specuative company that
is promising huge returns sometime in the future is worth
taking a gamble on because there's no cost of money.
When rates rise, especially real interest rates are firmly positive,
then there is a significant cost of money. In other words,
(05:46):
you could put your money in a government deposit, you
could be in a money market fund. You could get
a risk free rate that is just above inflation, so
even after tax, maybe you're above even, but your money's
not shrinking. Or you could own equities, and in our
view that that higher discount rate means there is there
(06:10):
are only certain valuation multiples that make sense. And if
the and if the valuation multiples like a price to
earnings multiple or price to cash flow, if it gets
too high, you have overpaid, and so you paid too
much for that stream of cash, and therefore you're very
unlikely to get your money back.
Speaker 2 (06:29):
Okay, so if you live at it like that, an
overload of the American market is overvalued. Yeah, expense to
the market that you wouldn't necessarily want to invest in. Yes,
there are there are expensive parts of the US market,
and there are more growth stocks, there's more technology exposure,
(06:49):
much more from a sector basis in the US than
outside the US, to the tune of like two and
a half times. Okay, So when you take the idea
to your clients that maybe it is time to move
a significant amounts of money out of the US into
more value orientated markets.
Speaker 3 (07:04):
What's the reaction.
Speaker 2 (07:05):
You're getting a different reaction to now than you might
have gone three four years ago, two years ago, one
year ago.
Speaker 4 (07:11):
We are getting a different reaction. A part of that
is the spell is broken. The long period of dollar
ascendency has turned. The US dollars lost some of its strength,
so investors aren't as concerned they'll be this constant if
they're dollar based currency headwind. They're looking for a tailwind now.
(07:31):
But also they recognize they need to be diversified. This
is a watchword of investing, whether it be for individuals
or institutions. And becoming over index to the US market
having too large an exposure just due to the letting
it ride having maybe not rebalanced back to the anacid
allocation that includes non US equities. I think they're nervous
(07:56):
about that now and investors are attempting now to get
more non US So it's not a stampede, but we
definitely see this trend.
Speaker 2 (08:05):
It's interesting, this idea, this bell is broken, isn't it
That even though the US marketer is really still performing
remarkably well, there is a sense that it's no longer
in absolutely longer given. It's no longer entirely reasonable to
have the majority of your money tied up in the US.
I mean, we've been looking at the passive investors and
retail investors all around the world are just buying into
(08:27):
global index funds, or even worse, just US index funds,
and even if they're in global, they'll have six seventy
percent of their money in one market. And it's hard
for people to turn from saying that that isn't really
the type of diversification that we've meant historically.
Speaker 4 (08:42):
And there are catalysts for Europe in particular that we
haven't seen in a long time. And some of this
is a byproduct of the political, diplomatic and terror related
stresses put on Europe, but needing to spend on defense
several percentage points more in terms of GDP. That's hundreds
(09:03):
of billions of euros of additional spending infrastructure. Having a
need now urgently for a harmonized EU capital market. All
of this speaks to the potential for Europe to become
a more attractive place for capital and even if it
isn't all realized, just some of it at the margin
(09:25):
that will help close that valuation gap, not close it completely,
but just narrow it from this extremely expensive US market
versus rest of world, in particular Europe in the UK.
Speaker 2 (09:39):
Yeah, so a big part of this is really about
the fiscal shift. So if in the US stimulus has
really reached something a limited at this point and that's
much discussed, whereas in Europe the space for fiscal stimulus
and that's going to drive this coming together evaluations.
Speaker 3 (09:55):
Yeah, fiscal rope in the US.
Speaker 4 (09:57):
My colleagues and I Cosway looked at to breakdown of
what created such a massive performance increase premium US versus
Let's just take Europe over the last decade and yes,
much greater sales growth in the US was a large contributor,
but the second largest contributor was multiple appreciation. In other words,
(10:18):
multiples just rose in the US. And we think a
good part of this is a function of a lot
of fiscal stimulus, and that stimulus now has to be
curtailed because of the US bond market is going to
constrain the politician's ability to keep spending with abandon.
Speaker 2 (10:38):
And let's stick with America for a moment. Do you
see that the new tariff regime, Not that we're entirely
sure exactly what it's going to be after this little
truth in ninety days, but we still don't know what
we are obviously, But do you see any sense that
that might end up being good for parts of US business?
That we may see this manufacturing renaissance which may change
(10:59):
the way the enemy works and hence the way the
market can be valued.
Speaker 4 (11:02):
From a causeway research perspective, we think it's unlikely. At
the margin, maybe more auto manufacturing, because that's one area
where President Trump is very keen to ensure there's more onshoring,
but there are low end products from just about everything
(11:23):
in the electronics components, consumer goods. Think about toys, for example, textiles,
they don't belong in a US manufacturing context unless fully automated.
And who's going to pay that upfront bill for those
automated factories? The returns don't make sense for companies, and
(11:47):
without some sort of bizarre government subsidy, we think it's
very unlikely. So those maybe some of that will move
out of China, as it already has, but it will
go to friendly countries and they will and it won't
be on you in US soil. We just can't see
a mannerfacturing renaissance. What we'd like to see is an
(12:08):
education renaissance, but that hasn't been mentioned yet.
Speaker 3 (12:11):
All right, well, let's have a look then at Europe.
Speaker 2 (12:14):
And in one of the pieces that you wrote recently,
you've got a great shot which shows the extent of
Germany's fiscal boost and it shows that if it works
out as expected at the moment, it would be a
bigger physical booth than the Marshall Plan, a bigger physical
boots than the reunification of Germany, etc.
Speaker 3 (12:30):
I mean as significantly bigger.
Speaker 2 (12:32):
Actually, And on your chart you've got that fairly clearly
divided between infrastructure and defense. So if you were investing
into Europe, you are slee Are those the sectors that
you're looking at.
Speaker 4 (12:45):
Most of the European listed defense stocks started moving last
year and they've had a significant run, so the market's
already gotten there. But the defense spending leads to a
whole ecosystem of stimulus in Europe. And one of the
companies that we like very much is in green transportation.
(13:05):
It's Alstam. They're the France listed world's largest manufacturer of
rail a rail equipment and signaling. They make the bulk
of their profits from services, in other words, servicing and
maintaining and upgrading these rail systems, whether they be rails
or subways or subway cars. And this is a company
(13:25):
that governments around the world and as well as in Europe,
recognizing more urbanization, will be spending on improving public transport,
long term contracts, very long term customers, well positioned. They
made some unfortunate acquisitions in the past which created some
contracts that were mispriced, and they management team has been upgraded.
(13:49):
This is just the sort of stock we like. At Causeway,
where investors had lost interests they thought the business wouldn't
do well, particularly given inflation and the cost of their contracts,
but we saw a management team capable of creating an
earnings turnaround and thus more cashful for shareholders. And it's
(14:12):
a it's a stock very emblematic of what I think
of as sort of the new Europe, where efficiency is
the watchword, corporate managements know they need to deliver for shareholders.
And then that's all very synergistic with ensuring the prosperity
of Europe and beyond.
Speaker 2 (14:29):
Yeah, and when we look at at infrastructure, I was
at a defense conference last week and a lot of
the discussion was around how infrastructure is effectively defense to
a degree, and that if you don't have a national
grid that works, you kind of stuffed before you even begin, right,
if you can't keep the electricity on in Fain and
Buttugal and France, then deciding from a pretty lousy base.
(14:51):
There's this blur between what is defense and what is
infrastructures that we would expect an awful lot of money
to go into, for example, electricity grids.
Speaker 3 (14:59):
Oh yes, across Europe, oh.
Speaker 4 (15:00):
Oh, very definitely already has and will continue to do so,
and rate bases will reflect that. But one area you
haven't mentioned that it's also very I think is very
interesting is how will in an aging population that boost
in manufacturing and all the stimulus, how will it translate
into output? And that's through automation. And although there are
(15:25):
interesting there are very well placed automation companies like parts
of Zeman's in Europe. The ones that are the most
undervalued and we think the greatest upside are actually in Japan,
companies like Panic in robotics or SMC in pneumatic equipment.
This is very I can see how people would be
(15:47):
board stiff listening to this, but this these are the
building blocks of manufacturing and of and of ensuring that
for example, the automotive industry or electronics industry, whatever it
is that where Europe or the US needs to onshore
for national security reasons that automation is essential for productivity.
Speaker 3 (16:09):
It's interesting, isn't it.
Speaker 2 (16:10):
There's a big divergence between the levels of robotics in
different economies. I mean, the UK were absolutely useless. We
have one of the lowest ratios of robotics to workers
of any developed countries. But some European countries are much
better at than we are.
Speaker 4 (16:25):
But the UK will likely catch up and the AI
enabled robotics will transform how products are manufactured and for
the better. That should ensure that we can, even with
a limited labor force, create the output necessary for GDP growth.
Speaker 2 (16:47):
So Japan is already responding to this demographic crisis that
we're seeing across the cross the rest of the Western world,
and they've done that to a large degree with much
more in the way of robotics, automation, etc. Than we
use elsewhere. And that's been relatively sex that's full in
the GDP ahead in particular hasn't follen or come off
in the way that many expected.
Speaker 3 (17:05):
So we have an example to follow.
Speaker 4 (17:06):
Yes, yes, their demographic situation is more dire than that
of just about anywhere else, but I would agree with that,
and that technology is homegrown for them.
Speaker 3 (17:18):
All the good.
Speaker 2 (17:18):
Robotics companies outside Japan that you're interested in.
Speaker 4 (17:21):
There are good ones that values are really in Japan.
And this has part lead to do with the fact
that the end had been extremely the en it's been
very volatile and now settling around one hundred and forty
five yen to the dollar. I think that investors are
concerned that the end may con might go on another
(17:42):
bout of appreciation which would be somewhat detrimental for these companies.
They do slightly better in a weaker yen environment.
Speaker 2 (17:49):
Do you have other investments in Japan with terrib qing one,
we're always talking about what amazing value it isn't and
coblitely being mildly disappointed by it.
Speaker 4 (17:58):
Amongst us c of what i'd call maybe mediocre corporate
governance type companies, there are some extraordinary world champions companies
like Murata in multi layer ceramic capacitors. They are the
best in the business, just the way SMC is the
best in pneumatic equipment. Imagine being number one across your
different industry verticals and marauder trades is if it's just
(18:23):
it's a cyclical aticyclical low so low in price to
book terms, low and uh in prospective pe multiple terms,
because investors haven't seen the kind of smartphone sales for example,
that would that would propel this stock forward. But what
we do know is that edge devices are coming, and
that our device is whether it be p seeds or
(18:44):
smartphones or any other type of device than wearables well
glasses for example, they'll be AI enabled. This is all
inevitable and the key for US at causeway is, find
these great companies when they're at sickle lows, be prepared
to own them for several quarters while the market digests
(19:07):
the disappointing news, and then then have a large position
when the cycle turns upward.
Speaker 2 (19:14):
Do you have any interest in the UK market? Do
you find you're talking about finding innovative companies, interesting companies,
best in class companies When you look at the UK
you can definitely find.
Speaker 3 (19:26):
Value here, yes, But can you find that kind of.
Speaker 4 (19:30):
Value companies in the throes of operational restructuring? We can
find that, and I consider that to be derivative innovation
because it requires tremendous discipline, requires management being able to
extract something from the business that no one else has
done before. And the best example I can give is
the UK aerospace company Rolls Royce at near death in
(19:54):
early twenty twenty during covid is wide body aircraft engines
that they manufacture. Planes were grounded, no flying hours or
little to know. The cash flow went into the red
and the company had to do an enormous rights issue.
Speaker 3 (20:10):
It looked very bleak, but a CEO upgrade.
Speaker 4 (20:14):
And a transformation of that business into this world class
company that's in a duopoly with ge and what we've
seen out of that is cash flow generation galore. And
that's a testament to the governance to the chairwoman need
a freu and a determination to get the right person
in the top job. We like to see that, and
(20:37):
when we see it, we are backing it.
Speaker 3 (20:39):
Are you still backing if you still invested in real road? Yes,
we are.
Speaker 4 (20:42):
How often does a value investor, which we are in
our global equity portfolio, how often do we get access
to a duopoly? What does it mean to be in
in a monopolist or a duopolist. It means you have
either none or one competitor, and that translates into pricing power.
Being able to go back to your customers and say
(21:05):
we're raising price and have no pushback at all. Rare
and in this environment.
Speaker 3 (21:11):
We like that.
Speaker 4 (21:12):
We like to see and that's why I mentioned Alstam
for example, being excellent at what they do in rail
cars and rail signaling gives them that pricing power and
having very few competitors, but roles having just one major competitor,
and wide body aircraft engines they're in a they're in
the catbird seat.
Speaker 2 (21:32):
If you look at things like that, But you're also
a valuation driven What is the signal for you, even
with an amazing company like that, to say, Okay, you're
producing vast and masive cash, you're a dua believe you
have pricing power. We love that, but now you're too expensive.
Speaker 3 (21:49):
Where are your parameter?
Speaker 4 (21:51):
So we work on a risk adjusted return basis, and
what that means is that for every stock that we
consider for our global Portfoliolo, we Causeway portfolio managers and
analysts and they're about twenty seven of us. We determine
the two year price target for the stock, where should
(22:13):
that stock trade two years from now based on the
as we discussed its earnings in cash flow, and then
we risk adjust that So using our quantitative multi factor
risk model, which sounds very complicated and isn't, we're determining
the incremental or additional amount of volatility that stock will
(22:33):
add to our existing portfolio if we actually bought more
of it. And some stocks add to risks we already have,
so they are very high risk and therefore on a
risk adjusted return basis, the risk will will make them
less attractive. And then there are other stocks that may
have very high returns but have very modest amounts of
(22:56):
additional risk that they pose to the portfolio, and they
will look very attractive. So we rank all these stocks.
We rank about one hundred and fifty stocks globally, the
ones we're most interested in on risk adjusted return, and
the highest ranking stocks the top fifty are typically well
(23:17):
represented in the portfolio, and the higher they rank, the
more we generally own. And as they do well, as
the price of the stock rises, unless we're raising our
to year price target, that means the prospective return is diminishing.
So the stock is descending, it's falling in that ranking,
and as it does, I'm finally answering your question, that's
(23:41):
when we sell, or would trim the stock at least,
if not sell out completely, and then reinvest the proceeds
those sell proceeds back into you guessed it, the highest
ranking stocks. This discipline process ensures there are no politics
in our approach. There's no seniority, there's no committee myopia.
(24:03):
It's all about what the stock can deliver risk adjusted
versus all the other candidates we have.
Speaker 3 (24:08):
That is a bottom up process. Okay, interesting, he did
answer my question. That was a great answer. Really interesting.
Speaker 2 (24:15):
Take you, but Listen, all the companies that we've talked
about so far have been very big. We've talked about
large caps, but I know you also have an interest
in smaller companies, which of course as well if you
really are a value investor. There's a lot of value
knocking around in small caps globally, even in the US.
There's a lot of value. That certainly is in the
UK where our smaller and midsized companies are on their
(24:36):
knees valuation wise.
Speaker 3 (24:39):
Tell me what your thoughts are there. Well, if they're
very small, we stay away.
Speaker 4 (24:43):
We need at least a billion US dollars in market cap,
and that would be an all free float.
Speaker 3 (24:49):
In other words, there can't be a large insider holding.
Speaker 4 (24:51):
There needs to be lots of trading liquidity, and I'd
say we're more comfortable in the three billion dollar and
higher level, where we have the ease and liquidity of
entering the stock and exiting as we see fit. In
that what I think of is more MidCap area. There
are plenty of stocks, there are no shortage of them.
(25:14):
The Smiths Group here in the UK is one we
like very much, or also in the UK SSP group,
wh Smith another one that when cause we gets excited
about these stocks. We end up owning five six, seven, eight,
nine ten percent of the outstanding shares and you can
understand our commitment because that means that we're in It's
(25:38):
going to be quite difficult to extricate our clients if.
Speaker 3 (25:41):
We called it wrong.
Speaker 4 (25:42):
So are the lesser liquid stock. The smaller it is,
the more we need to be absolutely certain that we
are We've made the right decision, and we believe that
the management team can affect the operational turnaround, the improvement
in earnings and cash that that we suggest that they should.
Speaker 3 (26:04):
What's the case for wh Smith wh Smith this morning? Yeah?
Speaker 4 (26:12):
Travelings, Well, travel is the case. And of all the
areas of consumer discretionary spend, travel is one that seems
to be most resilient and with travel comes expenditures. A
cousin to that is another stock we like very much,
(26:33):
List in the UK and also in the US. But
Panamanian Carnival Cruise. This is travel on steroids because this
is the world's largest cruise company fourteen million passengers last
year and they are now bringing passengers to their own
private islands to keep spending. So travel and spending go
(26:56):
hand in hand. And if you have a captive customers
you do with WHMI given their franchises and in airports
and train stations, or you do with Carnival, you've got
this cash flow machine. Carnival hasn't been a debt, but
they're able. They've already been announced some significant refinancing and
the trends look really good. They're eighty percent booked through
(27:18):
the end of twenty twenty five. That's a high level
of confidence even as we started this conversation in a
world of tariff uncertainty.
Speaker 2 (27:29):
W A. Smith also fits into your monopoly duopoly idea,
doesn't it, And that it's pretty much the only place
you can buy a newspaper at the app works in
the UK.
Speaker 3 (27:37):
There are no other options. That's it.
Speaker 2 (27:40):
The only place to buy your every thrillers and your
overpriced water and your sandwich, et cetera.
Speaker 3 (27:45):
It is W A. Smith. Carnival has competition.
Speaker 4 (27:48):
Well not really though I would really back on that Carnival.
You're on those ships, there is no competition. There is
nowhere to go. And when you're on their own private
island like Carnival with their launching in July, it's all theirs.
So no In fact, they have created. Once you have
bought that ticket and step more.
Speaker 3 (28:09):
Go on another ship. You can go on another ship.
There quite a few crews go not.
Speaker 4 (28:12):
Once you've once you've embarked, you have no choice. You're stuck.
Where is Carnival Cave? This is fascinating. I did not
know celebration. They're all these private islands are in the Bahamas.
Speaker 2 (28:23):
So you go there in the cruise ship, you anchor
off the private island. You spend, but you don't stay
on the private island. You spend more of your money
on the private extent. You get back on the ship
and off you go again.
Speaker 4 (28:33):
Yes, you go and spend money on the private island,
enjoying yourself with kayaking and water slides and I think
a tremendous amount of alcohol. Then you get back on
the ship and spend some more.
Speaker 2 (28:45):
And is this all part of the story about I mean,
I've been writing a bit about the travel industry and
the rise in the amount of money that people are
prepared to spend on travel, which is maybe partly about
COVID and people thinking, well, now I wan't to e
experience as opposed to stuff, but also partly and this
brings us back to the conversation we had earlier about
the present value of cash, but also the present value
(29:10):
of an experience is hugely enhanced by social media because
the experience has more status value out with the actual experience,
and you can keep it rolling for a long time,
so it has a value that isn't immediate and it's
just different and that gives it more value. Is that
part of that whole vibe.
Speaker 4 (29:30):
Yes, the baby boomers supposedly aren't this experience focused, but
we've seen indications to the contrary, and travel dollars leisure,
travel dollars to cruises seems to be very heavily skewed
toward that demographic.
Speaker 3 (29:44):
It's not the young.
Speaker 2 (29:45):
I thought that what we were saying was a rise
in younger people spending more money than you would expect
on vacation experience.
Speaker 4 (29:53):
Well, at the margin, there are more than you'd expect,
but it's still dominated by the retiree set. To your point,
they're very keen on experiences and are willing to spend
there in ways they wouldn't spend in any other type
of leisure.
Speaker 3 (30:09):
What about what about emerging markets.
Speaker 2 (30:12):
We've mainly talked about development markets across across this gal a.
There emerging markets where you up finding interesting stocks that
maybe Asia, maybe Latin America.
Speaker 4 (30:20):
We have a separate quantitabily managed emerging market fund that
is overweight Asia at present and even overweight China and
invests across the whole array of emerging markets. And then
within our global fundamental strategy we have some exposure. The
one emerging market that actually really should be classified as
(30:42):
developed where we have the most is likely South Korea,
and that has a lot to do with under evaluation
and the star performer there is some such Electronics, the
world's leader in memory semiconductors. They've a big consumer electronics business,
displays business, but Samsung trades like a cyclical memory semiconductor stock.
(31:07):
So when the memory semiconductor environment is oversupplied and prices
are falling faster than usual, the stock price tanks, and
it's in that lower level evaluation now. But what we know,
and it's Brian Chow who heads up our technology research
A Causeway says over and over again to the team,
(31:29):
compute equals memory. In other words, the more compute needed,
and every enterprise we talk to is adding compute capability.
They're moving their it to the cloud. They need to
be able to take all the data they have and
be able to extract important signals from that. They're using
AI ways they never did before. And that's just the start.
(31:53):
So the demand for memory and it'll be come from
s k Heinex, from then from Micron. In the US,
these three giants control the bulk of the memory semiconductor market.
This to us is just another example of the market saying, oh,
short term cycles down, we don't want it, and we
causeways say we want as much as we can get
(32:13):
because we know when the cycle turns up we will
have a very low entry price and therefore tremendous returns.
Speaker 3 (32:21):
So you use to see it c polygopoly.
Speaker 4 (32:24):
Yes, there's yes, this one in an oligopoly well put,
and it doesn't necessarily lead to tremendous pricing power, but
it does. There is a moat, and the moat is
the incredible cost of building these the fabs in order
to manufacture these semiconductors three billion dollars each or something
(32:45):
of that magnitude.
Speaker 3 (32:46):
The hell of a barrier to entry.
Speaker 2 (32:47):
Yes, do you hold any commodities companies any minus anything
like that?
Speaker 4 (32:53):
We do our sol or matol in steel. Why would
anybody buy steel in the Chinese they're dumping it? In
their thesis is they can't. And that's one thing that's
coming out of this tariff Breujaha, which is steel simply
can't be dumped on any The US in Europe are
going to be very careful to ensure that that isn't happening.
(33:15):
And you can't tranship it through Vietnam. It's still steel.
It can't be hidden our salaries to have a terrible
bound sheet now it's absolutely fantastics. They have a lot
of financial strength, so they have the ability to weather
all sorts of storms. But the need for steel is inexorable.
And maybe no big huge housing boom, but it doesn't matter.
(33:39):
And the surplus coming out of China, if it's controlled,
means that pricing should be better. So there's one. And
we also like Smurf at West Rock and Packaging, just
very very well managed business. And the concern about tariffs
and less shipments for linerboard container board demand would drop,
(34:01):
we consider that to be temporary and that ultimately e
commerce is a trend that doesn't stop and there will
be more need for their product. So we'll go for
a commodity company, if a very well managed b we
think the commodity itself has a reasonably rosy future, and
the balance sheet is excellent because commodity stocks can be volatile,
(34:24):
and the last thing you want is financial leverage along
with operating leverage.
Speaker 3 (34:30):
Okay, brilliant, that's a great one. Thank you for that. Listen.
I've taken up an overload of the other time.
Speaker 2 (34:35):
So I just got a couple of quick questions that
I kind of ask everyone at the end, and if
you don't have an answer, absolutely fine, Okay, But I
wonder if I were to offer you a choice of
bitcoin of gold, which you might take.
Speaker 4 (34:52):
I own some bitcoin and I don't own any gold,
but I own bitcoin because my kids shame me into it.
Speaker 3 (35:02):
What can we do to shame you into buying some gold.
Speaker 4 (35:06):
I think if the gold price sagged again, I might
consider it, But given how strong it's been, and I
understand in part the reasons, and we can see that
there's central bank buying, there's individual buying. There's a lot
of concern about about fiat currency being oversupplied, and that's
all very legitimate, and that's in part what drives the
(35:29):
demand for cryptocurrencies, especially the leaders like bitcoin. But at
least with crypto, there's you get to partake in it,
an exciting future that involves blockchain. Gold is just a
lump and I just have very little to say about
gold except without earnings and without cash flow, I'm less interested.
Speaker 2 (35:51):
Yeah, it's just not an asset for you. And what
are you reading at the moment? Financial and non financial?
Speaker 3 (35:56):
We don't care we this episode.
Speaker 4 (35:58):
I think lately it's been mostly posts that I've enjoyed
because I'm trying to get more technologically savvy, listening to
Mark Zuckerberg talk about Lama models.
Speaker 2 (36:10):
But.
Speaker 4 (36:12):
Get my head around what was going on in the
US administration. So I jd Vance's book. I read that
it helped me understand his background and maybe how the
perspective he comes from.
Speaker 3 (36:29):
He'll billy elogy.
Speaker 4 (36:30):
But since then, I think I've just cooled on books
and I'm more podcast focused.
Speaker 2 (36:36):
Okay, good, that's what I like to hear. Anyway, I
don't know how publishers would like to hear that. I'm
very keen to hear that about you and podcasts. Thank
you so much for doing us today. That was really
interesting and I think incredibly useful.
Speaker 3 (36:47):
Thank you, Thank you.
Speaker 2 (36:54):
Thanks for listening to this week's maryn Talks Money. If
you like us to rate, review and subscribe wherever you
listen to podcasts, and keep sending your questions or comments
to Merin Money at Bloomberg dot net. You can also
follow me and John on Twitter or x. I'm Marinus
w and John is John Underscore Stepic. This episode was
hosted by Me Maren Sumset Web. It was produced by
Samasadi Moses andam and tala Amadi. Sound designed by Blake
(37:16):
Maples and special thanks of cost Sarah catter Up
Host
Merryn Somerset Webb
Popular Podcasts
Las Culturistas with Matt Rogers and Bowen Yang
Ding dong! Join your culture consultants, Matt Rogers and Bowen Yang, on an unforgettable journey into the beating heart of CULTURE. Alongside sizzling special guests, they GET INTO the hottest pop-culture moments of the day and the formative cultural experiences that turned them into Culturistas. Produced by the Big Money Players Network and iHeartRadio.
On Purpose with Jay Shetty
I’m Jay Shetty host of On Purpose the worlds #1 Mental Health podcast and I’m so grateful you found us. I started this podcast 5 years ago to invite you into conversations and workshops that are designed to help make you happier, healthier and more healed. I believe that when you (yes you) feel seen, heard and understood you’re able to deal with relationship struggles, work challenges and life’s ups and downs with more ease and grace. I interview experts, celebrities, thought leaders and athletes so that we can grow our mindset, build better habits and uncover a side of them we’ve never seen before. New episodes every Monday and Friday. Your support means the world to me and I don’t take it for granted — click the follow button and leave a review to help us spread the love with On Purpose. I can’t wait for you to listen to your first or 500th episode!
Dateline NBC
Current and classic episodes, featuring compelling true-crime mysteries, powerful documentaries and in-depth investigations. Follow now to get the latest episodes of Dateline NBC completely free, or subscribe to Dateline Premium for ad-free listening and exclusive bonus content: DatelinePremium.com