Talk Your Book: International Stocks, So Hot Right Now

0:00Today's Animal Spirits Talk Your Book is brought to you by Schaefer Cullen Capital Management. go to cullenfunds.com to learn more about their global high dividend strategy, international high dividend strategy, and emerging markets high dividend strategy. That's cullenfunds.com to learn more. Welcome to Animal Spirits, a show about markets, life, and investing. Join Michael Batnick and Ben Carlson as they talk about what they're reading, writing, and watching. All opinions expressed by Michael and Ben are solely their own opinion and do not reflect the opinion of Ritholtz Wealth Management. This podcast is for informational purposes only and should not be relied upon for any investment decisions.

0:38Clients of Ritholtz Wealth Management may maintain positions in the securities discussed in this podcast.

0:47Welcome to Animal Spirits with Michael and Ben. Michael, good timing here. Thank you. International stocks are so hot right now. People are trying to figure out, is this real? Does this actually have legs or is this just another head fake? I'm not going to answer that question, but I'm just going to say, Ben, we're old. That was rhetorical. No, okay. Well, we're still using references from the aughts, the early aughts. And I'm going to give the full story on Animal Spirits, but those references, they don't play anymore. How about this? That's because the 2020s doesn't have very quotable movies.

1:18That's because it's 20 years ago and people don't remember things from 20 years ago. Like U.S. Underperformance. That's true. We spoke about this on the show with Raul, but we're talking about international stocks today. And investors, a lot of investors have literally never seen a period of U.S. lagging for more than, I don't know, two weeks. Yes, there hasn't been a sustained period of outperformance. And there hasn't really been a reason for it in this past cycle. And now people are coming around to the idea that maybe there is a reason now. And it seems to have come very fast. And the market's moved fast as well.

1:54But we get into all that great conversation. Raul Sharma, who is a portfolio manager and executive director at Schaefer Cullen Capital Management. He has been managing strategies for emerging markets and international stocks for well over two decades. Great conversation. Here's our talk with Raul.

2:14Raul, welcome back. Great. Thanks for having me, guys. So it's been a long period of underperformance for anything benchmarked, not that international stocks are benchmarked to the US, but in the eyes of clients, they are. It's been a long, painful period of underperformance. And some of the narrative heading to the end of the year, and really for the last couple of years was, what in the world could change the current trajectory, the current narrative of US dominance, particularly the mega cap tax? Like what could possibly change? And I know you're not necessarily a macro guy. Nobody could have seen this coming.

2:48Just talk through some of the dynamics that are in place that led to a reawakening of investors' appetite for stocks domiciled outside the United States. Well, I think it's a couple of things. I mean, I think first of all, the correction and the MAG-7 that we saw at the beginning of the year, I think that was kind of the start of it because just everybody owns these stocks. And it's not just US investors. When we talk to investors in Japan or South Korea and other places, they're all owning them too. They're not owning their own stocks. And so once those stocks started to finally lose, I think people are really looking for another home.

3:25And then probably more importantly, you are seeing some pretty meaningful catalysts, I think for the, I won't say for the first time, but so many at once, and I think bigger than before in both emerging markets and international developed markets. And I think the short story is that President Trump's policies are forcing some of these countries to do things that they really, frankly, should have done a long time ago. And I think Europe's definitely the best example of that. And so I think that's the start of it. I mean, there's a lot we could talk about within that in terms of specific catalysts, but I think I'll just pause right there.

4:01So one of the things that we've talked about for years is, listen, International emerging market stocks are way cheaper than U.S. stocks. But people have been saying that and saying that and saying, well, valuation itself is not a catalyst. And I think this is why it's so hard to predict these things in advance is because even if you try to come into the year saying, I think I know what the catalyst is going to be, no one is talking about this, the fact that Germany is going to spend billions and billions of dollars building up their defense. So is that the biggest thing right now, just that a lot of these countries are going to start spending money and go from the austerity mindset to actually, no, we're going to open up the floodgates a little bit?

4:38Is that the biggest one for you right now? That is certainly one of the biggest ones. Yeah. And I think kind of led by Germany, but you are seeing it kind of across Europe. They're talking about defense spending, big increases in defense spending, again, because of a reaction to Trump's policies, also an infrastructure fund. I mean, there's structures. There's a lot of needs for that, certainly in Europe and even in Germany, if you look at like the rail system and that sort of thing. And so, you know, and they're talking about creating physical unions to do all these sorts of things, things like joint procurement.

5:10And, you know, when you start spending a lot on defense, it's just not, you know, defense stocks that benefit. It's a lot of different kinds of stocks. I mean, industrial stocks, you know, defense is so high tech that there's a lot of demand for technology. So there certainly is the potential for a spillover effect. You know, but there's other things, too. I think very encouragingly, we're seeing consolidation in certain European markets, particularly in the financial sector. I think, again, after watching the U.S. banks do so well, they're just kind of looking at looking at, you know, the competitive landscape and saying we need to be bigger to compete against a J.P.

5:43Morgan. We just cannot do it. And so it's encouraging to see actually governments like saying Italy actually promoting consolidation and consolidation is a really good thing for industries to consolidate, whether you're the consolidator or you're just in that industry. The industry structure improves. So you're certainly seeing that in Europe. And that's also a good thing. Then there's the prospects for the end of the war in Russia. That has two impacts. One, you will see the risk premium on European stocks go down. And then there's a lot of reconstruction activity and a lot of increase in bank lending and that sort of thing that can happen.

6:17And so you're seeing markets like Poland and all of Europe that are well-positioned for that, if it happens. It's certainly a big if benefit from that. And it's all just happening at a time when, from a contrarian perspective, even after the little rally, equities, international equities are still so out of favor. If you look at the weight of non-U.S. equities in MSCI world, it's only about 30 % versus a long-term average of over 45%. And back in the early 90s when Japan boomed, it was well over 65%. So there's a lot of room for mean reversion. But I think these things really do bring the promise of earnings growth, which to your point was what was missing.

6:57It was just valuations. Now we have valuations and the potential for that. Yeah, well said. So cheap stocks with a positive catalyst, great things can happen. So at Schaefer-Cullen, you manage the global high dividend, the international high dividend, and emerging markets high dividend portfolios. Is any of what's going on making its way into how you think about the individual companies and the way that you construct your portfolios? Yeah, definitely. I mean, for the first time in a long time, starting earlier last year, we started getting involved in European banks. Those banks had also done a very good job of deleveraging.

7:30They started then having these excess capital positions, paying huge dividends with great dividend growth and also doing buybacks. Those are all things we like across all strategies. Even our emerging market strategy, you've seen exposure to, say, Eastern European banks in places like Greece and Poland go up for the very same reason. We manage with a dividend mandate in emerging markets. We do have a little bit of flexibility with somewhat lower yielders. So the other big thing that's happening is definitely, I think, in China with the internet companies. So we own two of those companies that are still quite cheap.

8:03And we could talk about the implications of DeepSeek, which I think has been a bit of another game changer year to date. That's interesting because that was one of the big things is just that, listen, the U.S. is just dominating technology-wise. And a lot of these other countries can't keep up. And China seems to be like the one place where, I don't know, I guess they've copied a lot of what we did here first and kind of are just doing it themselves. But those companies got dinged pretty bad for a couple of years there. So you think that the AI leveling of the world is going to benefit China potentially?

8:36What's the story there? Yeah, I mean, I think it's just the way I think about it. First of all, DeepSeek was a very impressive model, definitely. And it's hard to say how much lower cost it was, but I think it surely was a lower cost. Then we've seen other internet companies like Alibaba come up with their own large language learning model that is also even more impressive, arguably. And yet, when you look at these companies, I mean, the way I see it, if you look at the 10 or 15 companies, they're going to kind of enable AI, particularly by offering things like ChatGPT and Gemini and these models.

9:10Probably about five of them or a third of them or whatever are going to be Chinese companies. And then when you look at the valuations, they're some 50 % cheaper than their equivalents in the U.S. with maybe not the same capabilities, but close to them. And then the other game changer was that we saw Xi Jinping kind of get behind the internet companies for the first time. There is a meeting with all the leading companies, including Alibaba, which had kind of fall afoul of the Chinese government. And he's kind of looking to them to kind of lead the way. That's a huge change in what we saw, say, five years ago, because that was the thing that really brought those Internet companies down, the greater regulation coming out of the Chinese government.

9:48So I think all those things are definitely a game changer. And it just shows. And, you know, whether whether people like it or not, with all the tensions in that, I mean, China does have very leading technology. I mean, some of the older technologies, like, say, semiconductors, they might still be behind. But when you look at new technologies like electric vehicles or AI or renewables, they're quite, quite advanced. And there's a lot of different stats that you could point to that show that. So, you know, they're going to be around from a technology standpoint. And those technology companies trading so cheap should, you know, really be beneficiaries, I would say.

10:22Do you look at things top down from a country perspective and think that anything that's happened in the last six months or so changes how you view which countries to over or underweight? Or is it more just a bottom-up company thing that you look for the companies first in whatever country they're in? It doesn't really matter as much. We do it both, but we try to separate it. Because when I first started doing this about 25 years ago, we were hoping we'd get a very similar experience than what we get in the U.S. But we learned quickly that country factors really do matter. So we had to kind of come up with this framework to analyze countries.

10:53And so we do a lot of country research. So we're looking at stocks from a bottom-up perspective, but we analyze the countries too. It helps us learn a lot about the strengths of countries and which types of companies might be successful in those countries. But probably most importantly, it helps us limit exposures to countries that might look cheap but have a lot of other problems, whether it be the risk of war, the risk of sanctions, countries that have really weak external positions that have constantly declining currencies. So that's what we use the country research for, but we find it to be very important.

11:24Recently, international stocks have had higher yields than U.S. stocks. Is that because prices are depressed or is that just a structural phenomenon that they tend to pay up more of their earnings and dividends? Yeah, I think it's a bit of both. I would say they certainly were cheaper. even over the last couple of years, especially the companies focused on their dividends have been raising their dividends at pretty nice clips. So that supported higher yields. But then, yeah, I would say in the majority of countries outside of the US, the culture for dividends is kind of greater. They've been paying out more for some time than we are, of course, dominated by the MAG-7 and the US tech stocks, which don't really feel the need to pay dividends because they think They have such great growth opportunities.

12:08So I think it's all those factors that make yields approximately 50 % higher outside of the US than in the US. And that's also in emerging markets, by the way. I want to get more into your process in a minute, but I just wanted to ask about one more catalyst. Do you think all of these new policies are going to make for a weaker dollar as well? Because that's been another headwind for international stocks from the perspective of a US investor that the dollar has been so strong in recent years that that's been just another headwind there. Is that going to become a tailwind potentially if there's less foreign capital flowing into the United States?

12:42Yeah, that's always been the single best thing for non-U.S. equities. I think the stats are that if you look at the 10 periods when the dollar declined over the last, say, 30 years or something, IFA, MSCI IFA, which is developed market stocks, have performed by about 25 % with a 90 % hit rate almost all the time. And EM almost went up even more. It was over 40 % with an 80 % hit rate. So a declining dollar is the best thing for those stocks. And I do think there's a very good chance of that happening on the back of several factors. One is, you know, just kind of the technical position of the dollar and how well it's done.

13:17You know, over the last many years, it's kind of where it was back in 2001. It peaked back then and then went down for the next decade, which was a boon for non-U.S. equities. You know, we have a lot of countries that are interested in transacting and things other than the dollars to buy basic commodities like oil or food products, that's something that could also put a bit of pressure on the US dollar. I think the fact that you see gold doing so well is a direct indication of the fact that people are trying to diversify away from the dollar. But then probably the biggest thing is just, I think, Trump's policies.

13:48I think that he really does want to see the dollar go down. He might not talk about it so much, but certainly, and there's members of his administration that are even more outspoken about it. But if you want to make America great again and build manufacturing and attract manufacturing and investment into the US, and you're going to be employing tariffs too, will weaken the dollar is, in my opinion, the single best policy tool to do that. And pretty consistently throughout his career, he said that he thought that was a good thing. So that's another reason I think that the dollar could go down. I'm not going to say it's going to collapse or anything like that, but you could see weakness.

14:23And then a final fact number was, if the MAG-7 were by chance to continue to correct, that's a lot of dollars coming out the US. That alone could be the biggest near-term factor if it were to occur. If he were to change his mind overnight, and there's no indications that he's going to, but who knows, do you think that the rally in international stocks would fizzle out, or is there something bigger at play here? I don't think it would fizzle out. I think you would have to see more of a turn back in some of those pro-growth policies you're seeing in Europe or maybe, you know, kind of the war escalate or something like that.

14:55You know, I think, you know, what we've seen happen has been very good for non-U.S. equities. Again, his policies are promoting these countries to finally change. It's kind of unbelievable that they've taken so long to do so. And I can't imagine such an, you know, about face, you know, and then it varies by country. You know, he came out kind of really attacking Canada and Mexico. We would say that Mexico is doing a lot better than Canada and reacting to that. And so we think they're in a bit better shape than, say, the Canadian market. So it differs by market as well. So for the past, I don't know, five to seven years, but it felt like really last year, it felt like kind of a crescendo for not only people being against international stocks.

15:34I made the comment that I've in my career, I've never seen such poor sentiment against international stocks where people are just throwing their hands up and saying, I give up. I'm going to be all U.S. but it was also the the value investing in the dividends like why why am i buying these these low fundamental or low valuation stocks or these high dividend stocks when growth is is all that matters so maybe you could just give us a a whole background of of why you're looking for these certain stocks that for a lot of people were out of favor for some time well i think you know because we have great growth too you know we demand earnings growth from our companies too with Our only thing is that we're not willing to really pay up for it.

16:13And we think that investing in dividend-paying stocks is kind of a lower-risk approach. You do usually do better in down markets. So for our investors, they like kind of a lower-risk approach. But you'd be surprised, I'd say probably even more so in emerging markets with the opportunity set that you could get within these dividend stocks. So we kind of have less exposure now because they got a bit more expensive. but certainly, I mean, you know, emerging markets is a great place to play the AI supply chain, arguably better than in the U S because the AI supply chain is not going anywhere without places like Taiwan or even South Korea.

16:47And you'd be surprised how many of those stocks were quite, quite cheap and they're actually getting cheap again. But after correcting in the last couple of months paying really nice dividends. And so, you know, that's a team that we've always liked to invest in kind of playing these big mega tech trends through the supply chain. To talk about Europe and other places, we think the multinationals are quite interested. We're quite loaded up on them in our international portfolio. Because if you compare some of these global multinationals from, say, Europe or Japan to US peers, you'll see the businesses are kind of similar in terms of where their revenues and assets are located.

17:21But then you just look at the valuation. So I'd say about 60 % of our portfolio, if you compare it to US peers, it's about 25 % cheaper with literally double the yield. And when you look at companies like Siemens or Munich Re, which is the largest reinsurer in the world, I'm not sure you could say that they're really inferior to the US companies. I mean, I think you can for a lot of other companies, but so we think that's a great opportunity in itself too. So one of my favorite analogies that investors often use is they're throwing the baby out of the bathwater. So is that you think what happened in a lot of cases here where you could find these much cheaper companies because people are just putting all international emerging market stocks in the same bucket and saying, get me out of here?

17:59Absolutely. Absolutely. You're absolutely correct in that. And I think passive is the big driver of that because people just sell the ETF and maybe a third of the ETF is actually attractive in terms of the fundamentals of the companies, but they're selling those too, right? When you sell your ETF. So I think that that's definitely been a phenomenon that's happening and one that creates a lot of opportunities. Talk to us about how people are accessing your products. Are these separately managed accounts only or what does that look like exactly? Yeah, we manage separately managed accounts and mutual funds.

18:31So the exposure is generally the same because in separately managed accounts, if it's US-based, they're almost always custodian in US dollars. So whether it's an ADR or a local security, you're getting the same exposure. I mean, the way I like to think about it, whether you're buying a local share denominated in US dollars or ADR, you're basically buying two things. You're buying a foreign currency and you're buying the local stock. And so if the local stock goes up 1 % and the currency goes up 1%, you're going to be up 2 % of your position. If each goes up, if the currency goes down one and the stock goes up one, you're flat.

19:04But whether it's an ADR or a local, it's the same. And most of our clients through the SMAs are with the big major banks. We have several different relationships. And then we have the funds, I think. An additional thing is in emerging markets, I think mutual funds make a heck of a lot of sense because of the access capabilities. It's very, very hard and much more costly. And also, you have to give up a lot of your personal information that you might not want to access all the emerging market countries in a separately managed account. If you want to get into India locally or into the Asia market in China, or even locally into places like Taiwan or South Korea, not so easy.

19:40So I think the funds are a really good vehicle in emerging markets. People are kind of down on mutual funds these days, but I think EM is definitely an exception. Early in my career, I had to actually do this for separately managed accounts for the endowment fund I work for, for our separately managed emerging markets account. We were sending off letters and getting stuff stamped and notarized. And you're right, to get access to some of these countries is really difficult if you want to own these single stocks, correct? Correct. Yeah, it's very time consuming. So that's the beauty of a fund. You know, we could just do that on the behalf of investors.

20:10And, you know, John Doe doesn't have to give up his personal information. We're coming in as Cullen Funds Trust on behalf of our investors. Another advantage is that we could reclaim withholding taxes on the dividends for all the investors. That's a much more time consuming process in a separately managed account where the individual needs to go to his tax account and have that done. I know this is pretty in the weeds, but I'm assuming that we've got a lot of advisors listening. Why the mutual fund and not the ETF? What are the differences? Why can't you do that in that wrapper? I guess maybe if it's an active ETF, it would be kind of similar, but certainly we think the passive ETFs, they bring another layer of problems, particularly in emerging markets or even in developed markets.

20:48I just think that there's a lot of ETFs that perform pretty well, but I always think they're vulnerable in certain environments. And you never know when those environments come. So COVID was a great example when, you know, COVID ended up, we ended up having the most dividend cuts that we've ever seen in history. And so we were able to actively navigate through that environment by, you know, getting into companies in an extremely uncertain time that we felt had more secure dividends, whereas the passive approaches that were waiting to rebalance could, you know, could not do that, or even the index funds could not do that.

21:19And so the dividend streams of those funds went down a lot more than ours did. And then similarly, later in the year when COVID, you know, when it was seen that it really didn't have the negative economic impact that people thought, there was a huge increase in dividends and people started paying dividends in 2021 that they didn't pay in the COVID year. And so we were able to reposition into that and then benefit from the best year for dividend growth that we've ever seen in our history. Another example in emerging markets would be the ability to de-risk. So we were able to de-risk our exposure pretty successfully and get more or less completely out of Russia, whereas the ETFs, again, they have to wait to rebalance, and they're stuck holding those positions, and they took heavy losses for that.

22:00That's why I personally think active makes a lot of sense. And the other thing is if you're focused on dividend yield and dividend growth like we are, it's very hard to do that just quantitatively. And if you just look for the increasers, you tend to get a lower yield. If you look for the highest yield, you get a lot of companies with very poor corporate governance. So you really need a balanced approach. You really need experience. And I think that's what our team brings to the table. Looks like you have a relatively concentrated portfolio too. I think in your EM strategy, it says 50 to 70 names.