MASTERCLASS: International Investing - November 2018

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  • 51 mins 10 secs
Being overweight in the U.S. has served investors decent returns, but that may be about to change. With volatility hitting Wall Street and driving markets overseas, investors around the world are growing increasingly worried. Three investment strategists join together to discuss how to navigate risk, the effects on geopolitical landscapes and the overall global economy.

  • Patricia Ribiero - SVP, Senior Portfolio Manager at American Century

  • Brian Barish, CFA - President, CIO at Cambiar Investors LLC

  • Danton Goei - Portfolio Manager, Davis International & Global Strategies at Davis Advisors

For Financial Professional Use Only / Not for distribution to the public.



Susanna Lee: Being overweight in the US has served investors decent returns, but that may be about to change. Volatility is not just hitting Wall Street, but also driving markets overseas. Investors around the world are growing increasingly worried about the geopolitical landscape and the overall global economy. Joining us now to give us their take, are three investment strategists who are actively navigating risks outside the US markets. Welcome to Asset TV's International Investing Masterclass. Great to see all of you. Thank you so much for joining us.  Brian, let me start with you. Despite the struggles us stocks are currently facing, it's been a tough year for globalists because the US has still outperformed. That’s part of the biggest gap in performance; the largest in history. What’s led us here?

Brian Barish: I think what's led us here is two factors. The first is you've had superior earnings growth in the U.S. Some of that is not organic. It's a consequence of the tax cuts that came into effect earlier this year. And secondly, you have the U.S. being out of cycle with the rest of the world. So the U.S. is late in it's economic cycle. We have more or less full employment, where as Europe and other parts of Asia are still in a much different place. That's led investors to concentrate their capital and what they think is the best earnings growth and the most visible earnings growth and the most visible currency stability to the detriment of practically everything else.

Susanna Lee: Patricia, how has your key markets been impacted by the recent sell off internationally?

Patricia Ribiero: Yes, emerging market's actually has been impacted throughout 2018. But more recently the last three months or the last quarter, the impact has been pretty significant. There has been, you know there's drivers. Some drivers that have actually influenced that on the performance of emerging markets. There has been, the obviously, the expectation's of rate hikes in the U.S. Dollar appreciation has been another one. Turkey has been something that has created a lot of uncertainty for a period of time in emerging markets. And last, but not least, obviously very relevant has been the trade war between the U.S. and China.

Susanna Lee: So Danton, the trade war. It's been gaining a lot of attention. The IMF said in October, the trade war between the U.S. and China would reduce global GDP by eight percent by the year 2020. How worrisome is that outlook for your portfolio?

Danton Goei: The important thing is one, to understand what's going to be the impact on China and then two, understand what's the impact on the companies we're actually invested in. And so people are today really focused on the first part. And the first part, I think people have an idea of what the Chinese economy is that might be a little bit outdated, because over the last decade or so the economy in China has changed and transformed quite a bit. So if you look at, for example, net exports and percent of GDP, if you look a decade ago, in 2007, that number was nine percent of the GDP. So relatively a high number in terms of exports, less imports. Last year, in 2017, that number fell to two percent. So that's a big drop, nine to two percent, and what's taken up the slack has been the internal domestic consumption part of the economy. And that is less impacted by the trade war and exports. So there will be some impact.

Danton Goei: And in terms of the second point of what will be the impact on companies that you invested in there, you know at Davis we've invested really focused on the consumption related companies. The companies that are dependent on Chinese domestic consumption so they really are less impacted by that. So I think the overall impact might be a little less than people might think. Then dependent on what type of companies you own, the companies might be less impacted as well.

Susanna Lee: And I look forward to touching up on China in just a moment a little bit further. But Patricia, also despite companies, individual companies, individual countries are also something to take a look at when you're investing oversees. Which international assets are primed, in your opinion, and your coverage for price increase?

Patricia Ribiero: So for us, the way we look at the world, we see opportunities across emerging markets. There are always sectors, companies that are benefiting versus others that may not be doing as well. Some are more impacted by cyclicalities, others are not. There is a secular trend in emerging markets that are still there and all the consumer, you know affordability, financial penetration, credit penetration in emerging markets. Those are still there, and companies benefit and obviously the consumer's benefiting from that. So there's always, I think the challenge in emerging markets is you can not use the whole emerging markets. There's 24 countries that are part of the MSCI, and assume they are all the same. They are not. You have to really look from the bottom up and distinguish between the different assets.

Susanna Lee: And do you see any countries that are poised for price increases this coming year?

Patricia Ribiero: So you know what, I see opportunities across. You know even in, for example, China if you would talk again about China, but you know, there plenty of opportunities in China. There are opportunities in India as well. There are opportunities in Latin American. There are opportunities in Europe, in Africa. So there is opportunities across so that's not how I think about emerging markets, I think about companies. What are the companies that will benefit? You know, even in countries like, for example, South Africa where obviously the macro has not been positive, the political situation has not been positive at all, we still have some exposure there. We have exposure to a retailer in South Africa. We have exposure to a retail banking as well, an insurance company. So there are opportunities, even in countries where the macro is not attractive.

Susanna Lee: Brian over to you. There are rumblings on Wall Street right now that 2019's going to be a pretty rough year here. How's that going to impact oversees?

Brian Barish: Well I think a great deal to start out with the forecast for 2019, a great deal is going to depend on what the Fed actually does. So in our experience, emerging markets generally do very poorly when you have a rising rate environment in the U.S. and a rising dollar. It's just very hard for them to defend themselves against this. This happened in the late 1990s. It happened again in the 2008 time period for a different set of reasons, and it's happening currently. So our sense is that growth in the U.S. is probably going to slow from the current level and this will probably provide adequate cover for the Fed to stop rate increases next year. If that happens, given how compressed international valuations have become, which is quite compressed, they may be very well spring loaded and you could have a different set of circumstances where international actually does a lot better in terms of total return in the U.S. assets.

Susanna Lee: Like Brian just mentioned, much of the market sell off has been sparked by the presumptions of the Fed hiking cycle. Patricia, what is your outlook for interest rates globally?

Patricia Ribiero: Right. So for me, there is a difference. I think yes, emerging markets feel the pressure and they get under more, you know a lot more pressure when there is rate hikes in the U.S.; however, I think longer term, if we assume, as there is the perception today in the market, that rates, yes are going up, but they're still going to be at very manageable levels. I think emerging markets can manage through it. I think, for me, I think it's unfair to compare emerging markets today to what emerging markets was back in the 90s. It's a very different environment. I think the countries, emerging countries, have actually managed their economies a lot better. They have float in currencies. They managed their current accounts, even countries with current account deficits, debts a lot more manageable. So yes, they get under pressure, but it's not a long term effect, I don't think so. So it will be more manageable for emerging today versus what it was back in the 90s for sure.

Susanna Lee: And Danton over to you. How do global valuations compare, to you, on a relative to one another and the U.S. at this juncture?

Danton Goei: I think there's a very compelling arguing despite all the negative headline news out there for investing international markets and it is strongly supported by the valuation differences. If you look at today, the U.S. markets, the S&P500 trading about 16 times forward earnings. If you look at the international index, it's about 12 times. That is a big difference. And then if you look at other countries, like China or Hong Kong, you're talking about a ten times multiple. So those multiple differences are very large and speak relatively well for future returns in some of these international markets. So, I think the outlook is relatively positive despite, or maybe because of, the news that's out there but a lot of it's already been priced in.

Patricia Ribiero: And also one more thing I think is, if you look at global GDP, you are still looking at, even if there is a slight deceleration for next year, you know 2019 and even 2020, today, if you look at that slight deceleration, you still can not justify what we have seen. Sort of the disconnect between all the markets, right, emerging, international, and then U.S. as well.

Susanna Lee: So Patricia, you would think that, for internationally focused investors, they're not doomed to accept the rate of return in global markets to worsen?

Patricia Ribiero: That's right. I think again, I think there plenty of opportunities in emerging and across global markets, but certainly in emerging markets as well there are plenty of companies that are benefiting from a potential slow down in countries like China. If you look and you know what China does when there is a deceleration and they want to stimulate the economy, they will invest in infrastructure. So if you look at cement companies, it's a very attractive space to be today. Valuations are attractive and they will be growing, they will be accelerating their earnings. So there are plenty of opportunities, you just have to look for them. It's basically a stock pickers market.

Susanna Lee: Let's talk about China, Brian. With interest rates rising here, are they going to be able to manage their capital from flowing out of that country?

Brian Barish: That is one of the 64 dollar questions in the market right, is how do the Chinese manage this. They do have a lot of outflow doors that they could close and they have been closing those. What we see over the long term, is that China's growth rate, if you can image me drawing a chart here, is going to look like this. It's going to decelerate from what used to be some very high levels, but there still be waves up and waves down. Right now, we're in a down wave and that is a little scary because people want to wonder is this it? Just sideways like Japan did over the last 25 years. China still has a lot of industrialization and a lot of development left to go and I don't think so, but this is a new chapter for them where they're not going to have quite the same access to exports as a means of growth as they had previously.

Susanna Lee: And Patricia, you mentioned infrastructure and the government spending. They also rely a lot on their consumer spending. What worries you most about China?

Patricia Ribiero: I mean the worry for me would be if you obviously see the consumer sort of really shying away, and I think so far we haven't seen it. But if that was to happen, yes, that would have a more relevant impact today on the economy then it had in the past. But what we also have been seeing so far, even though it has been very gradual, is that the Chinese policy makers are actually very aware of that and there is slightly and carefully, is starting to make sure that the consumer in China doesn't get disengaged. Right, it's not sort of shying away from spending. We have seen even more recently, for example, with the taxes, sort of tax breaks for the consumer in China.

Patricia Ribiero: So there are levers that the Chinese economy, they can pull, there are levers they can pull in order to stimulate the economy more if they see that the economy is decelerating too much. If it is going to be a six point six or six point two, and if that is acceptable for the government, I don't know exactly, but I do know if they feel like it's starting to impact the growth internally, they will do more to stimulate it.

Susanna Lee:, do you agree? Do you think the market, though, has adjusted to a five percent growth rate? Patricia mentioned six point two, six point three, but five percent is well below that number. Is the market ready for that?

Danton Goei: Well, you know, the data so far has been, I guess, relatively encouraging. First half, GDP's up six point seven percent, six point eight percent. Last quarter about six and a half percent, so we're a ways off from five. But let's say, it is five. We're very happy here, and we're at three. And so if you're running at five, it's not as strong as before but it's still relatively good. And so I think there has been, like Patricia was saying before, there might be some impact, some deceleration, but the market reaction has been sort of over reaction to that, because if you're thinking about in a vacuum, how does five percent growth sound? Not too bad. What does that mean for the growth for the companies, for overall consumer demand, for retail sales? All those could be still quite good.

Danton Goei: There are a number of things Patricia said that you can do, that the government can do, they've cut taxes. A tax cut actually is relatively meaningful. I mean, the tax cut that we recently had was quite large. The tax cut that they had relative to their GDP was about two thirds as big as ours. So pretty big. They've cut the reserve requirement for banks as well.

Danton Goei: You were asking before about what might worry you about China. You know if anything they've been on the last five, ten years, on a liberalization path for the economy. Allowing for an ownership percentage to grow, just making a more open and competitive economy. The fear would be that they kind of pull back on that and say okay, we're in this tough environment now, let's shelve all that reform. Let's put it off for another five years and just focus on the here and now. I think long term, that could be negative. I mean, of course they could be supportive of current business situation now, but in general, the situation is very manageable there under the current environment.

Susanna Lee: And Patricia, the old adage, "The U.S. sneezes the rest of the world catches a cold." We've all heard that. Does that still hold true or is it China? Is it China? Do you think the U.S. markets can follow China's moves?

Patricia Ribiero: Those are the two largest economies, right? So, what we have been seeing actually with the trade war is that nobody's winning on that challenge, right? So there is impact on both sides here. But I think it would be a bit naïve to think today, that one doesn't need the other. Obviously I think from what we've already been seeing is that there is... they do need each other. So ideally what we should be seeing is that somehow they settle these challenges and issues with the trade war, and I think it would be helpful for everyone else, but I still think that where they are today, we're not going to be seeing that significant of an impact as maybe the market is pricing it. And that's what I think the disconnect is. The market is pricing a much bigger impact on the Chinese economy than what we see from the bottom up.

Susanna Lee: Right, and emerging markets outside China has had a terrible, a horrible, a very bad year. Both stocks and currencies have been hammered with U.S. interest rates rising and China's growth slowing. Brian, how can this trend turn around?

Brian Barish: Well, like I said earlier, I think the most important thing for emerging markets is to end the pressure. It's very, very hard for emerging markets to work well in a rising rate environment. As Patricia said earlier, a lot of emerging markets have improved their management of their external accounts relative to where they were in the 1990s. So they will let their currencies float and your exchange rate is one of the most powerful and important variables in an overall economy. This will help to balance the trade position and let countries get back into a growth position.

Brian Barish: One of the other challenges, looking at the emerging market landscape today versus years ago, many emerging markets, I'd say you know Brazil and Russia are most notable this way, they are commodity led economies. When you're a commodity led economy, you're kind of dependent on the overall world and how good the overall world does. So indeed, if China and the U. S. catch a cold, it's very tough for those countries to grow.

Brian Barish: On the other hand, when you get to Asia, you have a lot of countries that have vibrant companies that are developing intellectual property that are leaders in the categories that they're in. You and I were speaking about the Koreans earlier, for example. By developing your own intellectual property, you're able to really seize control of the narrative, independent of these macro variables. That's where we're trying to focus our energies currently.

Susanna Lee:, that's what Putin said, right? That people... the country that owns your artificial intelligence is going to win the trade war. But it's the consumer though- back to you Patricia, you said the consumer's what worries you the most in China and with emerging markets, eight percent of the world's population lives in emerging markets with a growing middle class. Is that where the investors are going to get their craving from? The consumers?

Patricia Ribiero: Yeah. So the consumer in China would be something to worry about if we see the consumption is decelerating. We're not there, so I'm not worried about that today. But if I were to see it happening, then it would be a worry. The beauty of this story of emerging markets has been consumption, has been... you know it's the growth in emerging markets across the board has been led by consumption. And it's a secular trend. It's, again, it's the age of the population in emerging markets. It's the growth in real wages. It's affordability obviously coming from that. It's credit penetration. So there is a lot good secular drivers in the emerging space, that it's making all these countries grow within. So it's their own economies.

The demand is coming from within those countries. And that, I think, it's a buffer that we see when we talk about commodities or we talk about trade, you know global trade. Yes, it helps every country, or quite a few of the countries, but remember there, for example, are countries in emerging markets that are actually beneficiaries of the commodities going lower, because they were importers of oil and all types of commodities, right? So there are some that benefit, actually, from that weaker global commodity prices. So again, I think you have to look at the individual countries and see what drives the economy, where is the consumer, and then from there you look at what are the drivers of potential names and companies for you to own. What's growing and what's not growing.

Susanna Lee: And Danton, for you, what are some new industries you're keeping an eye on?

Danton Goei: You know, one of the interesting things is I can go to China and spend the summer over there often, and you go there and try to see how they're doing, emulating some of the industries that we have here. How are they putting in plan sort of the Amazon model, or the Google model? And now, more and more, you're coming back with ideas of what U.S. companies might be doing in the future, based on what's happening over there. So artificial intelligence, with facial recognition technology. Or the way they're, in China, are revolutionizing retail, and what that means for, say Amazon' acquisition into Whole Foods going forward. And how that might use that based on what is happening over there.

Danton Goei: So I think it's interesting, going abroad now, and seeing these innovative international companies that might even be ahead of some of the U.S. companies now as a way to generate ideas and see where the world is going.

Susanna Lee: Brian, with U.S. rates rising, why is this time around different for emerging markets, like the 1990s with Asian Tigers?

Brian Barish: I think the main difference is, in the 1990s, the Asian Tigers were borrowing money, in dollars, in order to fund their own internal development and to manage their exchange rates. So the big difference is twofold. One, they're not borrowing as many dollars to begin with, and then secondly, they will let their exchange rates fluctuate. China actually sits a little bit in between, 'cause they technically have a float but it's a very controlled float, and they don't like to fluctuate very much.

Brian Barish: I think if I could maybe pivot a little bit in terms of this conversation, you know, I alluded to earlier that we have capital concentration in the dollar and dollar earning assets, U.S. [dox 00:26:44] or dollar earning assets, obviously. And that's where the world has gone. If we are able to look forward into 2019, I think some very big events are gonna be happening. One of the biggest is that in Europe they are going to be getting out of quantitative easing and eventually out of unconventional monetary policy in general. If you think back to the U.S., we got out of quantitative easing and unconventional monetary policy in the 2014-15 time period. And ironically, even though interest rates were rising off of a very low base, that's when the period of U.S. out-performance over the rest of the world really began.

Brian Barish: So if you look at Europe, at a lot of international currencies, even emerging market currencies tend to travel together, with the euro. It's a fundamentally undervalued currency on a trade weighted basis, but you've got zero ... I mean, in Europe's case, negative interest rates pushing it down somewhat artificially. So you take that away, using a human analogy you get out of the intensive care ward at the hospital, and you get back on the street and operating normally, and it's really very beneficial to business confidence and ultimately the stock market evaluations.

Susanna Lee: Mm. And moving elsewhere, Patricia, in Brazil, elections are coming up. How will the new president change things over there?

Patricia Ribiero: Yeah, so, elections are coming up this weekend, it seems that the candidate who is favored by the business community in Brazil is going to win the elections. It's positive because I think one of the things that's happened in Brazil obviously over the last few years is that there was that fatigue with the prior government, and the worries and the issues with corruption and everything else. So this new government seems to be clear from that. So that is a positive. Also the support from the business community I think is another positive for the country. So you're starting to see, and you're starting to hear, even internally in Brazil, that, you know, businesses are starting to really re-think about investment again, and it seems that we're going to see an opportunity here for some growth in Brazil or better growth, I would say, in terms of GDP investment, industrial production going forward.

Patricia Ribiero: I think it's positive, but the challenge is still to see what the new government is really gonna come up with in terms of the economic policies, right? That is still up in the air. It will be interesting to see who he also puts with his cabinet, his economic cabinet. So far, the names that have been floating around seem to be very pro-market, which is another positive, and since you've seen the market has been reacting positive the last couple weeks. But I think a lot is still up in the air. Let's see, you know, how it's going to be defined.

Susanna Lee: And please let me tap more into your wheelhouse. What are your thoughts about Mexico? Are there opportunities there?

Patricia Ribiero: Yes, there are opportunities in Mexico. As you know, the market was very worried the first half of this year about the president elect, López Obrador, and it seems that the market has calmed down with that. Part of it also because of some of the people that we're hearing that's going to be part of his economic team, during his campaign he has promised some issues. For example, he has promised to raise minimum wage in Mexico, that would be obviously very positive for the lower income population as well as consumption. So there is some trends that seem to be very positive, but I think the question there is the same as in Brazil. Let's see once those governments are in place, what the policies really are and how those will impact the economies and also the businesses in those countries.

Susanna Lee: Headlines don't cover India as much as it did a few years ago. Danton, do you see the economic struggle there recovering anytime soon?

Danton Goei: You know, India is on generally a positive path. But it's a little bit like the few years after, say, the Brazilian election, where there was a sort of period of honeymoon maybe, and people excited about a pro-business government. But then reality is getting the policies implemented and action happening, and that part is proving to be quite difficult. But long term we are optimistic about India. It's obviously a huge population, 1.3 billion people, has a lot of development ahead of it, and it's a generally young population, very dynamic country. So we are positive, but it's gonna be a long, long road. We're talking about decades of growth, and it's gonna be fits and starts for sure. It's a very complicated political process over there.

Susanna Lee: Patricia do you see Turkey also having a long road ahead?

Patricia Ribiero: So Turkey's a bigger challenge, of course, and it's been very much self-inflicted. The good news is that there is no contagion, right, across the emerging markets. There was a lot of worries about that. We saw some pressure with Argentina at the time, and clearly you saw that they came back and raised rates pretty quickly in order to manage that pressure. But there is no contagion across. Actually, if you look across emerging markets, the exposure to Turkey is minimal with any. I think maybe a little bit more exposure from the European banks, but even there it's more limited.

Patricia Ribiero: So Turkey has caused its own problems. I think it's reacted, obviously has increased rates some, because seeing that that wasn't manageable. So longer term, I think they will have to acknowledge that they have, obviously, to raise interest rates and again, manage the economy internally a lot better than they have so far. So I think it's a separate story, in a way. I would not carry the issue with Turkey into other emerging markets are this point. I don't see it.

Danton Goei: And I think, Brian was bringing before about the late 90s in Asia and how these countries had large foreign debts. Turkey, Argentina, those type of countries are burdened with that type of challenge. There's high foreign debt, and with the rising dollar makes it even more difficult.

Patricia Ribiero:That's right. But the good thing about that is that what you see is that the markets actually penalize those countries pretty quickly. There is no forgiving if you're not managing your economy better. And you see the pressure on them, right? Pretty fast, actually.

Danton Goei: Yeah.

Susanna Lee: Political upheaval has also his South Africa. Do we see any opportunities or sectors that are safe to play there, Patricia?

Patricia Ribiero: So we have some exposure to South Africa. The political, I know we talked about the economic situation has been very challenging there. But having said that, we see ... We have exposure to a retailer in South Africa, we see some opportunities there. Also retail banking. But very individual names. It's much more driven by bottom-up, specific names that are doing well in a difficult economy versus sort of talking in general that we see many opportunities in the country across the board.

Susanna Lee: Now, moving over to more developed markets. Brian, European evaluations are the lowest they've been in half a decade. Where do you see opportunities there?

Brian Barish: Well, Europe and international broadly are all very, very cheap. And ultimately, that question brings into some discussion that the growth value divide. So the US has been outperforming the rest of the world from the stock market point of view, and a lot of that is because the best growth companies happen to reside in the United States. So this would be the things and a few other business which is currently there aren't very many parallel companies, certainly not in Europe, certainly not in Japan, there's, a couple in China that look similar to the US things. For value, and consequently for a lot of the developed world ex US to do well, the growth value divide needs to flip a little bit. The growth stocks need to be less enticing and the value stocks need to be more enticing. Now, those kinds of changes have happened repeatedly over the course of history, and it tends to be a higher cost of capital that brings it about. In other words, if you're an investor to growth stock like Amazon, a lot of the value is based on where the company's going to be in the future, and once you have to start discounting that future back by a higher real discount rate, that starts to change the equation and tends to favor different investment alternatives.

Susanna Lee: And Dan, why do you think now is the time for international investing?

Danton Goei: One of the strongest reasons is the sort of the Willie Sutton reason which is sort of, that's where the money is and that's why Willie Sutton was interested in robbing banks. And if you look at the international and global landscape, 95% of the world's population is outside the US. 75% of the GDP is outside the US. A full 90% of listed stocks are actually outside the US and 60% of market cap is outside the US. So just focusing on the US, you're obviously missing a huge opportunity pool, and so if you can layer on that, good due diligence and feet on the street, and selectivity, I think you have a formula there for adding a lot of value.

Susanna Lee: Okay. Danton, for you, in the U.K., is it all about Brexit as well?

Danton Goei: No. I mean I think with a lot of these big macro- elements, it's a part of the investment process and thesis. But it's really only a small party. We're looking at companies there, and looking at companies that are gonna do well over the next five or ten years, and you can find that whether the terms are stricter or looser on Brexit. And so we're finding great companies, whether it's U.K., or the rest of Europe that our global multi-nationals, well positioned, market positions for decades, if not over a century. Well positioned globally in emerging markets as well as developed countries. And so whether ... What the terms are exactly for Brexit, it has a relatively small impact on the values of these companies.

Susanna Lee: Okay, Brian, moving over to Japan. Are assets poised to surgeon value there?

Brian Barish: Japan, ironically, in the context of this discussion, has been doing relatively the best of international markets this year. I think it's a good way to look at the totality of what's happening internationally. Japan went through a quarter century bare market where its economy utterly stagnated. That ultimately led to change. You had a change in leadership, you had a change in how they were conducting their monetary policy. You had a variety of internal reforms. I could still imagine better internal reforms than what they've had, but they have been impactful. And what that's done is it has unleashed evaluation in Japan. There's been a good amount of money to make, that market has held up pretty well all year long.

Brian Barish: And in Japan, you do have ultimately a variety of excellent companies that are ... They're really good at what they do, whether its making cars, making precision equipment, making various industrial tools. There are lots of good companies here and they are able to capture value and to grow their businesses accordingly because they continue to innovate and develop. So we like Japan, it will be interesting to see if the Japanese stock market is able to continue to do well if we have a slow-down ingrowth broadly around the world they are very dependent on growth outside of their region.

Brian Barish: And then you also asked about Canada. So Canada is a bit of a commodity sensitive country, it always has been. That's been a good thing in 2018, because oil prices have been rising and that's benefited them. On the flip side, we are a bit concerned, if you look at the Canadian stock market, banks are a big part of the market value. The Canadian property market has been very inflated for some time. Inflated property markets, and once they start to down turn, I think we lived through this in 2008 in the U.S., it's not a good formula. So I'm not suggesting it's going be anywhere near as bad as that in Canada, but it's not an area we're very comfortable committing capital at this time.

Susanna Lee: Do you see a gold rush happening in Canada, with the legalization of cannabis?

Brian Barish: No. You know, actually, my company, Investors, we're based in Denver, which is one of the first places where cannabis was legalized. So we can speak from the little bit of local experience. This will be a perfectly competitive commodified market. I can tell you that just driving around in Denver and the sheer number of shops that are out there, and they're staffed with a lot of people that they don't really care how much money they make necessarily, they just like kind of beating around green plants, let's call it. So I don't think there's going to be durable value creation there. It kind of reminds me of the cryptocurrencies but the 2018 version.

Susanna Lee: Patricia, are you avoiding exposure to any key benchmarks in a contrarian move?

Patricia Ribiero:. No we are not. We really look at the world from a bottom-up, where we see opportunities and then obviously incorporate the macro, the macro-assumptions, the macro-expectations into the bottom-up. And we really go where we find our best ideas.

Susanna Lee: And so how should your clients approach international allocation?

Patricia Ribiero: Yeah. For us, for emerging markets, I think you can't not be exposed to emerging markets, because it is the part of the world that's growing the most. Continues to be the one driving growth globally. The opportunities are pretty large. They, again, the secular trends in emerging markets are still here to stay. So you need to have exposure, right? And it's either businesses and you see that clearly with developed world businesses always looking to have exposure to emerging countries. And it's the same from an investor point of view. You need to have an opportunity to take advantage of that very strong growth.

Susanna Lee: Danton, can you talk a little bit about the importance of selectivity and the value of active management when it comes to investing internationally?

Danton Goei: Yeah, absolutely. I mean, selectivity we'd say is really at the heart of all of this. Whether it's the countries you're investing in, the industries, and then obviously the individual countries. And so that is supportive of the idea of active management versus passive, certainly in the international realm. So for example, the index, the global index has 2500 companies in it. I mean, there're obviously not 2500 grade or even good companies out there, and there're chock full of sort of state-owned, quasi-state run enterprises in there, just because they were big parts of the economy originally and now are in the indicies.  Those aren't companies that investors would wanna be in in the first place. But they will be if they invest in the index. So I think selectivity can add a lot of value.

Danton Goei: Also, when we look at emerging markets, for example, we think there are a lot of opportunities. But you also have to be very, very selective. So for example, our fund is in only four emerging markets versus the 24 in the 24, 26 in the index. So again, we're looking for countries where the rule of law, political stability, economic growth is there. We were talking before about avoiding exposure to foreign debt and dollars [inaudible 00:44:53] debt if you're an emerging market. That's all very important. So the countries that you're in, the actual industries, for example we're invested in China but we've really focused on just the consumer led companies there. -  So only a small part of the economy and there,

Danton Goei: And also, you know, there's a lot of questions these days about why international in the first place, right? Hey, America, the U.S. Indices have been so strong over the last decade, why should I even bother? And we would say, you know, the time ... That argument is an argument for investing internationally. I don't know if you saw recently there was an article by Jason  in the Wall Street Journal in September, and it was talking about how over the last five, 20, 45 years, the U.S. markets have beaten the international markets. But that's only because recently, the last decade or so, U.S. markets have been so strong, outperforming international Indicies If you look at ... There's been a long period of time, even the last decade before this one here, if you look at the ten years before December '07, international markets were ahead for a decade by 3.1 percent. Or if you look at the decade before December of '86, it was over six percent a year. So there've been long periods where international markets have been better, have done better than the U.S., and right now, we were talking about before the evaluation differences, seems very supportive of potentially that happening over the next decade.

Susanna Lee: aside from China, can you share with us the other three markets you're in?

Danton Goei: we are in India, and we are in Brazil, and we also have one holding in South Africa. There it's a multinational media company, a company called [Naspirs 00:47:02] that has sort of Internet-related investments globally. And so even in the toughest environments you can find very good companies. I mean, a good example is Ferrari in Italy. Italy has been through all ups and downs, and the change of government there. It hasn't mattered. Ferrari has done great, right? Over all these decades. So if you have a great company with a great global presence, it can work beyond what's happening in terms of the government level, the macro level. And that's what we're looking for. If you find the right company in India ... Right now, there's an airline over there, Indigo Airlines, it has 42 percent market share, it is the market leader obviously.

It's one of the lowest cost airlines in the world, as competitive as Ryan Air or Southwest Airlines lead by the ex head of US Airways, who's an Indian national and so you can find these great gems out there. It takes obviously work, feet on the ground, traveling, but if you can find them and hold onto them, you can really add a lot of value.

Susanna Lee: So Brian, for you as well as the boots on the ground approach essential to you?

Brian Barish: Yes. I think we've been talking a lot about the big picture internationally. I'd say it's an easy topic to hit, but ultimately we are talking about individual companies and in many countries, whether it's Europe or Japan or elsewhere, most of the blue chip companies and even the not so blue chip companies, their in markets are ultimately shaped globally and they're not home country bound. What we've generally tried to do is to find good brands or good intellectual property that can be monetized on a global basis.

Brian Barish: Right now because there's a great deal of fear and trepidation and hand wringing about what the global growth rate really is or whether emerging markets are going to continue to be stable or not, we're seeing a lot of companies that we think can monetize global wealth effectively and do so from the high quality corporate governance and capital stewardship wrapper of developed markets. So currently we own Daimler, which is one of the world's biggest automotive companies. It has retreated back to a 2009 type of evaluate level for instance, we own some of the global tobacco majors which are another way of getting at a per capita wealth, at a per capita wealth growth instead of affordable luxury around the world. Those are also at a financial crisis type of valuation levels because people have become afraid of the global growth and global pricing outlook, and we feel like ultimately a lot of these fears are likely to pass.

Susanna Lee: And Patricia, how about for you, what's your framework for diversification in your portfolio design?

Patricia Ribiero: So for us it's what we've been sort of discussing here and talking about which is yes, we need to really be very focused on finding names. So the macro is obviously very important in emerging markets, but at the end of the day is where can we find our best ideas? So having fundamental research, being able to do the research on these companies, being able to understand what are the drivers of growth for these companies, the circular or cyclical, but having a very good understanding what's driving growth is very important. And again, we can find names across all emerging countries, the ones that are better in terms of a macro and the ones that are not as good. For example, we own a name in Brazil that has been, as you know, Brazil has been a difficult market for the last several years, but for the last two years we own a retailer which is really focused on electronics, furniture, but also ... it's called Magazine Luiza, it's not a large cap, but it's doing really well growing their ecommerce very strongly with really high penetration in a market where penetration is still very small.

Patricia Ribiero: So being very focused management, that's the other thing that's very important, focus on the quality of management. Obviously there was a big, broad range, it's very important to see who are the people behind basically really taking those companies to the next level, also, very important. China, the same thing, there are good names to own. The consumer is still there in China spending, which is positive. We also have exposure, for example, to the cement companies in China, Anhui Conch is being a good name to own, being taking advantage of the growth also very strong pricing power in the markets where they're in. So there are many names to own across the board. It's really doing the fundamental work, the bottom up and being selective.

Susanna Lee: And how do you feel about investing in China right now? Do you think the transparency of the government is open enough for investors?

Danton Goei: We've seen in terms of the accounting standards to be relatively good. Now when we invest in China, we've only invested in US ADRs or Hong Kong listed stocks. We've not invested in A listed companies that are using Chinese cap. That's something possibly for the future, we just haven't felt comfortable enough to your question about doing that so far. US listed companies have us cap, Hong Kong listed companies have international cap, those are very strong sort of accounting standards, the listing requirements are also stronger, so we've felt we've kind of derricked it that way. REMOVE 47:36 – 48:08

Susanna Lee: Patricia, when we talk about China there are oftentimes a lot of students come there, come here, go back. Will the brain drain here be beneficial to China in longterm.

Patricia Ribiero: Yeah. I mean, one of the things that you have seen over the more recent past with the government is that they have actually been investing a lot in education in China. And it's actually good names, there are some good names to own in the education space in China. The government has actually been making a very big effort to invest in that and making sure that they're bringing the level of education much higher than what it was in the past. People come to the US, but what we're also seeing is that a lot of the universities in China, you're seeing a lot of graduates coming through. So if you were to look at, for example, in terms of engineers in China, the number of engineers that are coming out of higher education in universities in China is significantly higher than the US, so there was a lot of focus from the government investing in that space to be able to, again, to be more innovative rights, to have the quality of management, to really bring along the whole business sector and in other areas as well.

Susanna Lee: And Brian, I'm going to bring this to you first. This is going to be the last question for everyone at this table, but you've mentioned it earlier. Do you think the US dollar can last as a preferred global currency?

Brian Barish: Oh, that's a very good question. People have been wanting something other than the dollar to be the preferred global currency. At least we have a few more alternatives since the end of World War II and ironically, here we are 2018 and it's still the dominant reserve currency. I think some of the other options like the euro can do better than what they've done, but one is still challenged to find really great alternatives to it. I personally think if we could have a better alternative, it would be good for everybody, but at the moment, we're still waiting on good alternatives.

Patricia Ribiero: In my opinion also, I think for now I don't see an alternative.

Susanna Lee: Dan, you also think the dollar is the gold standard?

Danton Goei: Yeah. Tough to see over say the next five or 10 years. The euro, you can always worry about governance there and accountability of the countries within it because it's a basically ... it's a partnership and a lot of cajoling and it's hard to get everyone in line. The other large currencies and countries like the renminbi are just not ready for that. The capital markets are certainly not large enough, liquid and open enough. So yes, for the foreseeable future that US dollar is probably going to remain as the reserve currency.

Susanna Lee: And Brian, just sticking with the euro real quick with the reserve currencies, there's talk that European Union may just become separate again. Do you see that happening?

Brian Barish: I think that's a very remote possibility. Part of the reason why they went to a common currency in the first place is to dig up the railroad tracks to any alternatives. So if you were to suddenly reintroduce the Italian lira and the French franc and the Dutch guilder and on and on, it would be chaos. You would have depressionary type of condition. So you're forced to find a way. Dan described it very accurately, it is definitely a partnership and sometimes not all the partners behave themselves, but ultimately they all have to behave themselves in order for this project to work, and they do have much better mechanisms to cause that to occur.

Susanna Lee: And for awhile, Patricia, China thought they could step up to the plate and be the reserve currency. I mean, what's the likelihood of that?

Patricia Ribiero: Well, maybe one day. I don't think we're there yet.

Susanna Lee: Brian, your ideal portfolio manager world, what would be the best event to happen for you in 2019?

Brian Barish: It would be a one two punch. The US stop raising interest rates. The Euro's do raise interest rates and nothing explodes.

Susanna Lee: the likelihood of that?

Brian Barish: I think it's pretty good. I think it's at least 60%.

Susanna Lee: Patricia, do you also agree that the US might start raising interest rates?

Patricia Ribiero: Yeah, I think that would be definitely positive for emerging markets. And then the other one is some resolution on the China-US trade war. I think that would be helpful as well.

Susanna Lee: And Dan, the president is pressuring to stop raising the rates, make it zero like it was for Obama. What your thought on that?

Danton Goei: I'm hopeful that the fed sort of stays independent, and I expect them to remain independent. So I don't expect that to sort of ... Presidents in the past have tried that before and it hasn't really had a long term impact on impacting federal reserve actions.