INTERVIEW: Investing in a Shaky World by Sandra Ward
Summary: Barron's interviews Rudolph-Riad Younes, co-manager of the Julius Baer International Equity Fund, which has gained 17.5% annually over the past 5 years, and presently manages $43b. Younes shares his macro-economic outlook, and then gives 5 stock picks that he expects to outperform in the coming year, though none of them trade on the U.S. boards (a telling sign?). Macro-economic views: 1) U.S. corporations have globalized, and are more concerned with the global economy than the domestic. An example: Profits are historically 5.4% of GDP; currently they are 10.2% due to companies exporting labor offshore. 2) Real inflation, which includes house prices, energy etc. (excluded from CPI) is at 7-10%. Wage increases are not reflecting this. How are workers keeping up? By withdrawing equity from their homes. Once the house-as-ATM line-of-credit dries up, Younes foresees significant wage pressure. 3) Bond prices are too high and yields too low. 4) If the inflated profit margins (see above) revert to their mean (i.e. 1/2 of what they are presently), P/E (now at about 15) would have to go to 30, making equities unsafe. Nasdaq and Japan bubbles have still not fully deflated. Picks: 1) Richemont—a Swiss luxury watch-maker who owns the Cartier label, among others. He likes luxury stocks because the strength in Asia drives luxury consumption. Forecasts are for 6-7% annual growth in the luxury sector for the next 10 years (and he thinks this is low). 2) State Bank of India—India's largest commercial bank. He likes their 'hidden' real-estate portfolio; they own 40% of their 14,000 branches, and the residences of their 200,000 employees. India has a low loan-to-GDP ratio (42% compared to 130% in China). Their current return on equity is 18%, while many European banks are doing 25-30%, leaving them ample growth room. 3) HK Ruokatalo—a Finnish meat processor. Meat consumption in the area is expected to grow 10% annually for the next 10 years. Finland's proximity to Russia, the Baltics, and central-eastern Europe and its familiarity with the region is fueling corporate growth there. 4) Commerzbank—the second largest corporate bank in Germany. The German economy is showing signs of recovery, and banks stand to benefit from growing loan demand and industry consolidation. Their return on equity is only 10%, leaving lots of room for growth (see above). 5) Impact—a Romanian builder that controls 18% of the Bucharest housing market. Romania enters the EU in 2007, which will drive its economy for the next 5-10 years. Office space in Bucharest is 10% of Warsaw's despite their similar populations. A 5% vacancy rate signals a supply/demand imbalance.
Quick comment: Worries about home-equity loans and low bond yields have frequented Barron's pages of late. Increased Asian demand for luxury jewelry has not escaped Tiffany & Co. (NYSE:TIF); in a recent conference call a VP commented on its growing distribution base in Japan. India's growth potential has been noted by others; General Motors Corp. (NYSE:GM) and Ford Motor Co. (NYSE:F) recently begun targeting India's middle class. Specialty ETFs that trade domestically yet offer exposure to foreign economies are a welcome vehicle for investors who don't have the time or the ability to research individual companies, but want some of their portfolio invested outside U.S. borders. Eddy Elfenbein tracks how foreign iShares ETFs have performed in comparison to domestic ones (clue: they're vastly outperforming). But all this unbridled enthusiasm for foreign markets gives Geoff Considine reason for pause; he worries standard risk measures are being ignored.