Theme and Background
This chapter discusses the geographic allocation logic of the Oakmark International Equity Strategy in the third quarter of 2023. The report emphasizes that regional weights are a natural outcome of bottom-up stock selection rather than active macroeconomic judgment, but currently, Europe offers the most significant value opportunities.
Core Views
- Europe is the most attractive region for value investing at present, primarily based on the extreme spread between valuations and earnings yields.
- Japan presents difficulty in finding targets that meet value criteria, as despite improvements in corporate governance, the overall ROE remains too low.
- China is not uninvestable, with sporadic opportunities available, but geopolitical and debt risks must be managed through risk premiums and position sizing.
Key Arguments and Data
1. Europe’s Value Advantage:
- Major German indices trade at over 10 times next year’s earnings, while the 10-year German government bond yield stands at 2.7%, resulting in a spread of over 7% between the earnings yield (approximately 10%) and the bond yield.
- In comparison, the S&P 500 Total Return Index has an earnings yield of only 5.5%, while the 10-year U.S. Treasury yield is higher, leaving a spread of only about 1%.
- European blue-chip banks benefit from rising interest rates, which improve profitability, and are more conservative and safer than U.S. banks.
2. Japan vs. Europe Valuation Comparison:
| Metric |
Japan |
Europe |
| P/E Ratio (Current) |
~14x |
11x |
| P/E Ratio (Next Year) |
- |
10x |
| Average ROE |
8% |
15% |
3. China’s Opportunities and Risks:
- German automakers (e.g., Mercedes-Benz, BMW) derive approximately one-third of their business from Asia (primarily China), but management indicates stable operations, expected profit growth, and no pursuit of volume at the expense of value.
- Alibaba holds a market share of about 40%, which has declined due to regulatory pressures, but its technological and scale advantages have prevented a collapse in profitability; its spin-off plans help unlock intrinsic value.
- China’s high savings rate, trade surplus, and substantial foreign exchange reserves can address public and real estate debt issues.
Companies/Assets Involved
- BNP Paribas (France): A representative European blue-chip bank, planning to become a global investment bank, benefiting from rising interest rates.
- CNH Industrial (Italy): A manufacturer of agricultural and construction equipment, with Precision Technology Solutions driving automation and productivity.
- Bayer (Germany): Its Crop Science division invests over €2 billion annually in R&D, addressing global population growth (UN projects an increase of 2.2 billion).
- Amadeus IT Group (Spain): A leading global provider of travel booking data and aviation software, benefiting from the recovery in international travel (reaching 80% of pre-pandemic levels in Q1 2023).
- Ryanair Holdings (Ireland): A low-cost short-haul airline, benefiting from the rebound in European travel.
- Accor (France): An international hotel franchising and management company, benefiting from the travel recovery.
- Mercedes-Benz Group, BMW (Germany): About one-third of their business comes from China, with cautious optimism; they trade at 3 times cash flow, are cash-rich, and engage in share buybacks.
- Alibaba Group (China): Bullish view due to peak regulatory pressures, spin-off plans, and technological and scale advantages, with valuations far below those of typical enterprises.
Investment Implications
- Overweight Europe: Focus on blue-chip banks (e.g., BNP Paribas), agricultural technology (CNH Industrial, Bayer), and global travel-related companies (Amadeus, Ryanair, Accor).
- Underweight Japan: Due to a mismatch between valuation (14x P/E) and low ROE (8%), making it difficult to find broad value opportunities.
- Selective Holdings in China: Opportunities exist in tech leaders like Alibaba, but geopolitical and debt risks must be hedged through position sizing (overall weight management) and higher risk premiums.