Amidst elections and volatility in Europe – we see opportunity | International equity market commentary 2Q 2024
Oakmark is the mutual fund family launched in 1991 by Harris Associates, the Chicago deep-value firm founded in 1976 (about $105bn AUM). Bill Nygren runs the flagship Oakmark Fund and David Herro the Oakmark International Fund, buying businesses at large discounts to intrinsic value and holding them like owners — publishing quarterly fund commentaries, market commentaries and insight articles.
In plain words
This article notes that European stocks fell due to political events like the French election, creating opportunities in overlooked value stocks. Meanwhile, AI hype stocks like Nvidia have become extremely expensive—its market cap rivals the entire French stock market—reminiscent of the dot-com bubble. For regular investors, it suggests avoiding chasing fads and instead looking at cheap European companies. It's worth reading because history shows trend-chasing often ends badly, while buying during fear can pay off.
Oakmark's 2024 Second Quarter International Equity Report notes that European markets experienced volatility due to the European Parliament elections and the uncertainty surrounding the two rounds of French elections. The Oakmark International Fund declined by approximately 4%, while the Oakmark Int
Theme and Background
This chapter discusses short-term volatility in European markets triggered by political events such as the French election, as well as the impact of the AI theme frenzy on global capital flows. The report argues that despite valuation contraction in European markets and a strengthening US dollar, highly attractive investment opportunities are emerging in overlooked value stocks.
Core Thesis
The author clearly asserts that the current market is experiencing a "new frenzy" similar to the 2000 dot-com bubble, with capital frantically flowing into narrow thematic sectors like AI, leading to extreme valuation inflation for related companies (e.g., Nvidia's market capitalization approaching that of the entire French or UK stock market). Counterintuitive judgment: The decline in European stock prices due to political events does not reflect the intrinsic value of companies but instead creates better buying opportunities. The outlook for value investing is "extremely bright."
Key Arguments and Data
Comparison of historical annualized returns for the two funds: International Fund 10-year return 2.68%, 1-year return -3.01%; Small Cap Fund 10-year return 4.09%, 1-year return 5.19%; expense ratios 1.05% and 1.34%, respectively
- Short-term Performance: The Oakmark International Fund fell approximately 4% in the second quarter, while the Oakmark International Small Cap Fund declined about 3%.
- Macro Factors: Uncertainty from the European Parliament elections and the two rounds of the French election led to sharp volatility in European bond and stock markets.
- Valuation Comparison: The price-to-earnings (P/E) ratio of European markets has been compressing over the past 10 years, while the P/E ratio of the US S&P 500 has expanded significantly (Chart 1 shows diverging trends).
- Strong US Dollar: Since its low in 2011, the US Dollar Index has appreciated by over 40% (Chart 2).
- Extreme Valuation Cases:
- Tesla's market capitalization has surpassed that of the entire European automotive industry.
- Nvidia's market capitalization is approximately $3 trillion, nearly equal to the total market cap of the French or UK stock markets, or the combined market caps of Germany and Italy.
- Historical Lessons: During the 19th-century railway boom and the 2000 dot-com bubble, most related companies ultimately went bankrupt. Thematic investing itself does not create value; only applying a theme to specific business practices can generate shareholder value.
Companies/Assets Involved
From 2014 to 2024, valuations of US and European stocks diverged significantly. The S&P 500 P/E ratio rose from 17x to 26x, while the MSCI Europe fell from 17x to 15x, with the gap reaching a decade high
| Company/Asset | Role/Key Data | View |
|---|---|---|
| Tesla | Market cap exceeds the entire European auto industry | Serves as a case of thematic investing, suggesting potential overvaluation |
| Nvidia | Market cap ~$3 trillion, close to total market cap of France or UK | As the "darling" of the AI theme, valuations are extremely inflated |
| MSCI Europe | 10-year P/E ratio persistently below S&P 500 (Chart 1) | Overlooked, valuations are attractive |
| S&P 500 | 10-year P/E ratio persistently expanding (Chart 1) | Driven by AI thematic capital flows, valuations are elevated |
| US Dollar Index | Appreciated over 40% since 2011 (Chart 2) | Suppresses valuations of non-US assets, but may be nearing a turning point |
Investment Implications
- Long European Value Stocks: Stock price declines caused by political events create buying opportunities; the per-share value of portfolio holdings continues to grow.
- Avoid the AI Theme Bubble: Steer clear of "thematic stocks" with extreme valuation inflation, such as Nvidia and Tesla; history shows most thematic companies eventually go bankrupt.
- Focus on Overlooked Areas: Capital flowing from value stocks to the AI theme has made valuations in sold-off sectors highly attractive; contrarian positioning is warranted.
- Leverage the Strong US Dollar: The dollar has strengthened for 13 consecutive years and may be nearing its end; the dual pressure of currency and valuation on non-US assets (especially Europe) is likely to ease.