Stocks A to Z / Stocks B / Berkshire Hathaway (BRK.A)
No. of Recommendations: 1
Everyone has seen the charts: massive US outperformance, lagging growth in Europe/China, political uncertainty in emerging markets, strong USD, etc.
However, the contrarian in me thinks there might be some opportunities in foreign markets. W Trump, i see a potentially falling dollar, inconsistent policy and outright large valuations gaps between foreign and US markets. (The last I saw was a 3std dev spread in performance and valuations) We all know the risk, and I am starting to think there is a potential for upside surprises outside of the US.
Whats everyone think? Anyone taking a meaningful stab at foreign markets?
No. of Recommendations: 21
Whats everyone think? Anyone taking a meaningful stab at foreign markets?
From a macro point of view, maybe there isn't much point till there is a clear change of relative direction. i.e., non-US holdings start doing better.
My main concern is that most of the world's companies with the best business economics, no matter where their clients are, are listed in the US. So you have to work that much harder to make sure your ex-US listed investments are of at least equivalent quality.
I have heard that there is an exception: smaller listed firms in Europe are superior, in some ways, to smaller listed firms in the US. But gosh that is going to take a lot of reading.
You could dabble. Novo Nordisk (NVO at $87.37 in New York) is certainly a lot cheaper now than it was, cheapest since middle of last year.
The big booze companies (Diageo, Campari, Pernod Ricard and Rémy Cointreau) as a group have sold off quite a bit, mainly the unwinding of the post-pandemic bump, but to the extent that they are now cheaper than usual. Cheapest in a decade or more, on some metrics. I think an allocation to each of them might do well.
DEO at $126.93, DFDCF at $6.20, PRNDY at $22.90, REMYY at $6.05.
A rule of thumb of mine: when venturing outside the US, family and insiders get first dibs on the money. Make sure you are getting a decent dividend, so you know at least some of the benefit is coming to you. For bonus points, if it's a conglomerate with several listed entities, buy the one that is paying a high dividend that is the main investment vehicle of the controlling people...they generally need the income, so they will generally make sure that share class gets the sweetest deals and no dividend cuts. This is particularly true in (say) Korea and France, but many other places too.
Jim
No. of Recommendations: 2
i see a potentially falling dollar, inconsistent policy and outright large valuations gaps between foreign and US markets. (The last I saw was a 3std dev spread in performance and valuations)
We all know the risk, and I am starting to think there is a potential for upside surprises outside of the US.
Where? Europe is committing financial suicide. (And social suicide as well.) For example, Germany is losing more and more large industries every day. Similar stories in lots of the other European contries.
BRICS is growing, but it's too soon to say how it will turn out, and many of thoce countries you would *not* want to invest in.
The US will probably be the least bad place to invest for quite some time.
Anyway, a lot of US companies do major business in foreign countries.
No. of Recommendations: 4
Make sure you are getting a decent dividend, so you know at least some of the benefit is coming to you.
One company I've picked up a bit of is Total (TTE). I consulted for them in the distant past, and they were a good company, with a smart and dedicated staff that worked some long hard hours. Total has lagged XOM and even OXY a bit, but the current dividend is 6.1% with a P/E of 7.7. Contrast to XOM with dividends of 3.7% and 1.8%, and P/Es of 13.
No. of Recommendations: 3
While i agree with everyone about lack of innovation, regulation, corporate governance in foreign markets, wouldn’t you all consider that backward looking? While there isn’t a catalyst in the immediate future, going forward, the valuation spread (US is almost 2x more expensive that foreign) seems a bit extreme. The amount of articles i see about “American exceptionalism” and death of Europe makes me interested. Perhaps even the MAGA movement is the catalyst, forcing other nations to reform and step up.
In the end, the starting earnings yield of 6-7% vs 4-5% is meaningful and allows for upside surprises vs. sky high expectations.
No. of Recommendations: 25
While i agree with everyone about lack of innovation, regulation, corporate governance in foreign markets, wouldn’t you all consider that backward looking? While there isn’t a catalyst in the immediate future, going forward, the valuation spread (US is almost 2x more expensive that foreign) seems a bit extreme. The amount of articles i see about “American exceptionalism” and death of Europe makes me interested. ...
It probably depends on your time frame.
Sure, there is a price for everything. At the moment one could argue that it's a choice between fair companies at fair prices outside the US, and the home of some better companies at painful prices inside the US.
If you want to make a smart trade over a short to medium time frame (a cycle, say), then it could work well. All you need is confidence in this situation, and (critically) picking a passably good moment for the entry and exit so you catch the right part of the cyclical mean reversion. The current situation might end right away, or it might go on for years. It won't be an overnight thing, so one could probably jump on board the cycle after it has turned.
Conversely, if you want to hold things for a long time, you want absolutely the best quality companies you can get at a reasonable price. The US has lots of companies with wonderful economics, but it seems that the intersection set with "reasonable price" is pretty much the empty set at the moment.
Here is one of the metrics I track on how fully valued the US market is: the median price-to-sales ratio among the largest 400 non-financial firms in the S&P 500. Non-financial because "sales" is an ill defined concept for a bank, and median so it's tracking the boring middle-of-the-pack big firm rather than a few extraordinary outliers that people like to build narratives around. The average of that median P/S 1997 to ~2017 was 1.56, perhaps the "modern era normal". The current number, 3.625, is about 2.4 times as high as that normal, and almost exactly twice the highest value in the credit bubble peak.
The ratio was never over 2 at any time in US history before late 2013, but we're 86% above that line now. Prices are to most investors the way water is to a fish: it seems so normal it's not even noticed or questioned. But in investing, it has a meaning: is an annual dollar of sales at a boring middle-of-the-pack firm really worth that much more than it used to be? In present value terms, will one earn back what you pay for that boring stock before it goes bust? The answers are "no", and "probably not".
Jim
No. of Recommendations: 1
Hi Jim,
Why do you think this is the case? I see its not as pronounced in the S&P600. Do you think for the S&P 500 its in part, companies are more profitable and maybe with such a large weighting in tech and services rather than say the 90s where the index was more capital intensive with utilities, energy and industrials having a larger weighting?
thanks
No. of Recommendations: 2
A 19 page article from Goldman Sachs about the UK market vs the US market
https://www.gspublishing.com/content/research/en/r...From the article.
More UK companies are talking about moving their listing to
the US (Ashtead is the latest to propose a move). The
valuation gap to the US has become larger (Exhibit 1). And
only a small proportion of this is due to sector distribution;
every sector in the UK is on a double-digit P/E discount to its
US counterpart sector (Exhibit 2). This discount is of course
a Europe-wide phenomenon, but the gap between the UK
and US is especially large.
US companies are far more profitable, but even relative to
ROE, the UK market trades at a low multiple vis-a-vis other
markets; the UK has roughly twice the ROE of Japan but a
similar Price-to-Book (Exhibit 3).
Aussi
No. of Recommendations: 25
Why do you think this is the case? I see its not as pronounced in the S&P600. Do you think for the S&P 500 its in part, companies are more profitable and maybe with such a large weighting in tech and services rather than say the 90s where the index was more capital intensive with utilities, energy and industrials having a larger weighting?
Why is the US market expensive? The simplest response is "prices fluctuate". There has been almost no penalty for buying dips for a long time, so the market ratchets upwards till something breaks. More subtle answers come from macroeconomics: other things being equal, or even approximately equal, it's pretty much an identity that a rising government deficit will cause corporate profits to soar, which of course causes people to want to own more equities.
Yes, there are certainly some very good large firms that are tech or tech-adjacent. But that isn't the only thing going on. It's still a big market.
I don't think the S&P 600 is cheaper the way that it seems to be. The valuation gap seems large, but the quality-of-firm gap is also large, and perhaps larger than in the past. The quality of small, as opposed to mid-cap, firms in the US had deteriorated a lot, so I will talk about that, as typified by the Russell 2000 crowd. A lot of this info is from a recent FT.com article.
Random observations:
Even the rest of the S&P 500 isn't so hot. The S&P 490 (all but big 10) manages to produce only 2/3 of the total S&P 500 profits.
Smaller companies are much more exposed to higher interest rates than large companies. S&P 500 firms are 6% floating debt. For the Russell 2000 the figure is 30% floating.
BofA estimates that if interest rates stay at their current level, it will translate into a 32 per cent hit to earnings over the next five years. Even if the Federal Reserve starts cutting rates as expected, it will still trim small-cap earnings by 24 per cent.
The share of R2000 firms with negative forward earnings is a bit jagged with the business cycle, but it's basically a steady upward march from 1995 (5% of them) to the early 2020s (30-35% of them). Some of that is due to a big class of profitless biotech firms, but the trend is true even without them. Excluding those, gross profit to assets has fallen from almost 30% in 1995 to consistently under 20% in the last few years.
Why are t he firms worse? The simplest explanation might have a lot of power: private equity. Better quality private firms get bought rather than going public, so the entrants to the public markets are worse on average. And the good public ones get bought, too, leaving the rump. This is compounded by the fact that the giants have eaten the lunch of a lot of firms. There used to be such a thing as a small profitable retailer.
They quote a fellow from Furey Research:
"In the 1990s, small caps routinely delivered returns on invested capital in the teens and even as interest rates declined to 1% in the early 2000s, small company investors could expect low double digit returns from the index. Those days, like my 32-inch waist, are sadly long in the rear-view mirror. Today, the index ROIC is struggling to hang on in the 3-4% range."
Bottom line: I'm not sure going smaller is such a fantastic idea. The results from seemingly similar valuation anomalies in the past may not work out the same way because it's not really the same comparison: there is a lot more "scratch and dent" in the smaller bin these days.
Jim
No. of Recommendations: 2
Thank you for the detailed and balanced responses
I know “sentiment” is rather amorphous and difficult to measure. However, i have noticed more and more justifications for valuations stock in US (growth, ROE, governance, etc.) In addition, i have noticed more and more hatred for European markets. Throw in some Economist/Barrons magazine covers about the US dollar and unstoppable rally in the SP500. I think we could potentially see a turning point. Often times markets turns before a visible or apparent catalyst emerges. Or they turn when it’s darkest/max pessimistic. Is it dark for foreign markets? In my opinion, it could very well be.
No. of Recommendations: 4
No. of Recommendations: 8
S&P 500 firms are 6% floating debt. For the Russell 2000 the figure is 30% floating.
Granted, I'm still on my first cup of coffee, but I had to parse this sentence a few times.
A brief PSA for anyone whose brain is equally sluggish on a cold pre-dawn wet winter Monday, I think what Jim is saying is "Of the total debt burden borne by S&P 500 companies, only 6% is floating debt, whereas for Russell 2000 companies, 30% of their total debt burden is floating"
-- sutton
off for a refill
No. of Recommendations: 7
Granted, I'm still on my first cup of coffee, but I had to parse this sentence a few times...
I think what Jim is saying is ...
Probably the first time in history I have seemed insufficiently long winded. Prolix. Sesquipealian. Discursive. Logorrhoeic.
Jim
No. of Recommendations: 6
... other things being equal, or even approximately equal, it's pretty much an identity that a rising government deficit will cause corporate profits to soar...PS, for anybody wanting a little primer on this, emphasizing the impact on corporate margins and profits, this is quite a nice blog post about the ever-fascinating Kalecki-Levy Corporate Profit Decomposition.
https://blog.variantperception.com/p/understanding...Jim
No. of Recommendations: 5
“ Probably the first time in history I have seemed insufficiently long winded. Prolix. Sesquipealian. Discursive. Logorrhoeic.”
————————-
——post definitely made the cut for my “new word for the day”
ciao
No. of Recommendations: 1
Jim,
About the Kalecky Levy thing, not sure I buy this:
"If the government funds the tax cut by reducing other expenditures by the same amount as the lost taxes to keep the deficit unchanged, then in aggregate, the corporate sector will lose that amount in revenue. Consequently, the boost in profits from the tax elimination would be negated by the reduction in revenue, effectively nullifying any net gain in profits."
There is something goofy in the way they balance the equation so neatly ignoring the time lag between cause and effect. Their theory has to be wrong.
No. of Recommendations: 1
Is it dark for foreign markets? In my opinion, it could very well be.
Maybe?
From Vanguard ETFs:
S&P 500 (VOO) has a P/E of 28x, earnings growth of 20%. Rest of US (VXF) at 22x and 16%, Rest of world (VXUS) at 15x and 15%. Blithely assuming the growth rate materializes forever, the payback periods (when you get back $1 in earnings for $1 price today), are 10 years for S&P, 10 for rest of US, 8 for RoW.
Inflation can be ignored assuming earning yields are approximately real.
All math aside, foreign companies that pay regular dividends, have a boring business, and are in somewhat business-friendly and shareholder-friendly-ish jurisdictions, are good enough for me. Nestle, Roche, a few large ones in the FTSE UK index, etc.
No. of Recommendations: 12
About the Kalecky Levy thing, not sure I buy this:
"If the government funds the tax cut by reducing other expenditures by the same amount as the lost taxes to keep the deficit unchanged, then in aggregate, the corporate sector will lose that amount in revenue. Consequently, the boost in profits from the tax elimination would be negated by the reduction in revenue, effectively nullifying any net gain in profits."
There is something goofy in the way they balance the equation so neatly ignoring the time lag between cause and effect. Their theory has to be wrong.
The explanation is a bit fuzzy around the edges, as any simplified illustration must inevitably be. The equation has more than two parts. But the theory itself is sound, for the simple reason that it's a mathematical identity. It can't be wrong, by definition. It's true over time, and true in every sub interval. However it is true that a change in one component can certainly drive a subsequent change in other component(s) which arrive only after a lag, so it is a dynamic system.
It's the same sort of thing as realizing that the global weighted average cost of borrowing (interest rate) has to equal the global weighted average return from lending (interest rate). You might think that borrowers are paying more than lenders are getting, but that's not possible in aggregate.
The best part of that blog post is the second graph, with the components stacking to show what is determining net profits. Why did US net profits soar from 1970 to 2025 on trend, as a share of GDP?
The purple section (households, basically savings rate) shrank a lot, and the red section (government deficit) rose a lot. Those changes were huge, so profits had to go up. They probably won't go down as a share of GDP unless/until one of those shrinks a lot. I can't imagine any sequence of events that would cause the US government sector deficit to shrink meaningfully in the next couple of decades, so the only big "risk" to US profits (as share of GDP) is probably if US consumers were to get into the mood of saving more.
The first order effect of big tariffs is pretty clear from the equation, too. (red section government deficit smaller, black line profits lower) But the exact subsequent rebalancing of all the components is harder to predict. All we know is that the equation will remain true, macroeconomic Whac-a-mole: any push down here will be (must be) accompanied by some pop up over there.
Jim
No. of Recommendations: 5
All math aside, foreign companies that pay regular dividends, have a boring business, and are in somewhat business-friendly and shareholder-friendly-ish jurisdictions, are good enough for me. Nestle, Roche, a few large ones in the FTSE UK index, etc.
I hold several foreign stocks and such Roche (RHHBY), NXPI, and Alibaba (BABA)and am always annoyed by the ADR holding fee that I am charged. Its almost like having a negative quarterly dividend. I hold my stocks in a Schwab account. Is there an alternative I should be pursuing to avoid the fees?
No. of Recommendations: 2
I hold my stocks in a Schwab account. Is there an alternative I should be pursuing to avoid the fees?
These are charged by the bank sponsoring the ADRs so I don't think there is any way of avoiding these fees. For dividend paying ADRs they are deducted from the dividends so think of them as an expense ratio of your home made ETF. Not high enough (for me) to be a big concern.
BABA, you are on your own, for several reasons 😀
No. of Recommendations: 5
Part of the Kalecki-Levy Corporate Profit Decomposition is personal Savings. As I wondered what is included in personal savings I was surprised that both realized and unrealized capital gains are excluded from personal savings. So, if you buy a stock for $100 and sell for $200 and pay $15 capital gains, your personal savings actually decreases by $15 rather than increasing by $85.
So as a retiree, even if your net worth is increasing due to capital appreciation exceeding spending and taxes, your spending and tax payments are lowering the nations personal savings rate. Makes me wonder about financial posts discussing the changes in personal savings rate.
Aussi
From the St Louis Fed
https://www.bea.gov/resources/methodologies/nipa-h...Income and saving
Some economic theorists have broadly defined income as the maximum amount
that a household, or other economic unit, can consume without reducing its net worth;
saving is then defined as the actual change in net worth.18 In the NIPAs, the definition of
income is narrower, reflecting the goal of measuring current production. That is, the
NIPA aggregate measures of current income—gross domestic income (GDI) for
example—are viewed as arising from current production, and thus they are theoretically
equal to their production counterparts (GDI equals GDP). NIPA saving is measured as
the portion of current income that is set aside rather than spent on consumption or related
purposes.
Consequently, the NIPA measures of income and saving exclude the following
items that affect net worth but are not directly associated with current production:
• Capital gains or losses, or holding gains (or losses), which reflect changes in the
prices of existing assets and thus do not represent changes in the real stock of
produced assets;
• Capital transfers, which reflect changes in the ownership of existing assets; and
• Events, such as natural disasters, that result in changes in the real stock of existing
assets but do not reflect an economic transaction.
Thus, for example, the NIPA estimate of personal income includes ordinary dividends
paid to stockholders, but it excludes the capital gains that accrue to those stockholders as
a result of rising stock prices. Personal saving is equal to personal income less personal
outlays and personal taxes; it may generally be viewed as the portion of personal income
that is used either to provide funds to capital markets or to invest in real assets such as
residences.19
No. of Recommendations: 0
Part of the Kalecki-Levy Corporate Profit Decomposition is personal Savings. As I wondered what is included in personal savings I was surprised that both realized and unrealized capital gains are excluded from personal savings. So, if you buy a stock for $100 and sell for $200 and pay $15 capital gains, your personal savings actually decreases by $15 rather than increasing by $85.
This doesn't sound right. If you sell the stock in your brokerage account for $200, and then use the brokerage account to pay the $15 capital gains tax, then if the brokerage account doesn't count as "savings", then no change in overall savings occurs. If you sell the $200 in the brokerage account and pay the $15 tax using a savings account, then savings goes down by $15. But if you transfer the $200 to [what is considered] a savings account, and then pay the $15 tax, then savings goes up by $185. When an account considered "savings" goes up, then overall savings goes up, when it goes down then overall savings goes down.
I'm not sure what they count as "savings" with regards to which accounts are included, last I looked into it, the classifications seemed weird to me as well. But I suppose they have good reasons for measuring it the way they do.
No. of Recommendations: 2
The simplest explanation might have a lot of power: private equity. Better quality private firms get bought rather than going public, so the entrants to the public markets are worse on average. And the good public ones get bought, too, leaving the rump. This is compounded by the fact that the giants have eaten the lunch of a lot of firms. There used to be such a thing as a small profitable retailer.If true, then perhaps "if you can't beat them, join them? I briefly looked into how to invest in private equity:
You can join directly if you are an "accredited investor". The bar for that actually isn't all that high (although specific firms may set the bar much higher). A number of members of this board might meet it. But the investments are complex and fees are high, so a lot of due diligence would be required, along with a firm grasp of one's personal risk profile.
perplexity.ai lists four of five ETFs that supposedly provide exposure to private equity, I won't list them here because their performance sucks.
BlackRock seems interesting (BLK). It does private equity, and all sort of other things, and its performance doesn't suck (includes dividends. data from Yahoo so possibly dodgy):
From 1999-10-04 SPY BLK
Annualized Return 0.0826000 0.2105000
maxDrawdown 0.5518946 0.6035948
From 2002-01-01 SPY BLK
Annualized Return 0.0954000 0.1764000
maxDrawdown 0.5518946 0.6035948
From 2010-01-01
SPY BLK
Annualized Return 0.1405000 0.1361000
maxDrawdown 0.3371727 0.4390169
From 2015-01-01
SPY BLK
Annualized Return 0.1339000 0.1440000
maxDrawdown 0.3371727 0.4390169
From 2020-01-01
SPY BLK
Annualized Return 0.1524000 0.1917000
maxDrawdown 0.3371727 0.4390169
But it is a very complicated company, see below, and I for one wouldn't know how to value it.
From Yahoo's profile:
BlackRock, Inc. is a publicly owned investment manager. The firm primarily provides its services to institutional, intermediary, and individual investors including corporate, public, union, and industry pension plans, insurance companies, third-party mutual funds, endowments, public institutions, governments, foundations, charities, sovereign wealth funds, corporations, official institutions, and banks. It also provides global risk management and advisory services. The firm manages separate client-focused equity, fixed income, and balanced portfolios. It also launches and manages open-end and closed-end mutual funds, offshore funds, unit trusts, and alternative investment vehicles including structured funds. The firm launches equity, fixed income, balanced, and real estate mutual funds. It also launches equity, fixed income, balanced, currency, commodity, and multi-asset exchange traded funds. The firm also launches and manages hedge funds. It invests in the public equity, fixed income, real estate, currency, commodity, and alternative markets across the globe. The firm primarily invests in growth and value stocks of small-cap, mid-cap, SMID-cap, large-cap, and multi-cap companies. It also invests in dividend-paying equity securities. The firm invests in investment grade municipal securities, government securities including securities issued or guaranteed by a government or a government agency or instrumentality, corporate bonds, and asset-backed and mortgage-backed securities. It employs fundamental and quantitative analysis with a focus on bottom-up and top-down approach to make its investments. The firm employs liquidity, asset allocation, balanced, real estate, and alternative strategies to make its investments. In real estate sector, it seeks to invest in Poland and Germany. The firm benchmarks the performance of its portfolios against various S&P, Russell, Barclays, MSCI, Citigroup, and Merrill Lynch indices. BlackRock, Inc. was founded in 1988 and is based in New York City with additional offices in Boston, Massachusetts; London, United Kingdom; Gurgaon, India; Hong Kong; Greenwich, Connecticut; Princeton, New Jersey; Edinburgh, United Kingdom; Sydney, Australia; Taipei, Taiwan; Singapore; Sao Paulo, Brazil; Philadelphia, Pennsylvania; Washington, District of Columbia; Toronto, Canada; Wilmington, Delaware; and San Francisco, California.
No. of Recommendations: 1
Sorry, didn't mean to hijack the post. If BLK is of interest, perhaps its best discussed in a new thread, it's OT to this thread although in reply to a poster.
