Trends Watch: Investing in International Equities

EisnerAmper’s Trends Watch is a weekly entry to our Alternative Investments Intelligence blog, featuring the views and insights of executives from alternative investment firms. If you’re interested in being featured, please contact Elana Margulies-Snyderman.  

This week, Elana talks with Michael Jiang, Partner & Portfolio Manager, Tancook Investment Management.

What is your outlook for investing in international equities?

The outlook for investing in international equities is highly positive. We believe international equities should be a fundamental component of most investment portfolios, offering vital diversification and greater access to investment opportunities. Diversification is pivotal in managing investment risk, and international equities provide exposure not only to diverse geographic regions but also to varied economic sectors, currency dynamics, and sector trends. 

International equities also open the door to more investment opportunities. At Tancook, we scour the globe for exceptional businesses, regardless of their location. While we can find great companies across all industry sectors in foreign markets, it is also true that a country can have certain strengths, in the same way that the U.S. has a notably strong technology sector. Each country develops its unique comparative advantages, driven by historical, cultural, and economic factors. For example, France’s dominance in luxury brands is attributed to its profound fashion legacy and creative ingenuity. Germany and Japan stand out as manufacturing powerhouses due to their skilled workforce, renowned for precision and efficiency. Australia and Canada have robust mining sectors thanks to their vast territories abundant with natural resources. Furthermore, international equities offer investors access to high growth emerging markets, expanding their investment opportunities. 

From a valuation perspective, international investing has become particularly appealing at a time when the U.S. stock market is reaching all-time highs. We find more value opportunities in international markets. For instance, the MSCI EAFE index is trading at a P/E multiple of 16x, remarkably lower than the U.S. market’s 26x. 

At Tancook, we advocate for active investing in international markets. While the U.S. market has proven to be difficult to beat for many professional money managers, active management potentially adds more value in international equities, given the complexities and the greater potential volatility in foreign markets. 

Where do you see the greatest opportunities and why?

We believe the greatest opportunities lie in acquiring high-quality businesses at attractive valuations to hold for the long term. To realize this objective, we try to take advantage of short-term volatility created by cyclical downturns or temporary company-specific issues. 

Through such a lens, we see greatest opportunities beyond the technology sector. For instance, we see compelling investment opportunities in consumer staples and health care. Many consumer staples companies boast robust brand power and valuable distribution networks, while health care businesses benefit from high regulatory barriers. Despite their current underperformance, these sectors hold significant potential for long-term investors, and it would be unwise for an investor to let them be eclipsed by the tech sector. 

We also see good opportunities in emerging markets and Asia. For example, if one chooses carefully, one can find exceptional value in China and Hong Kong. Emerging markets such as India, Mexico, and the Association of Southeast Asian Nations (“ASEAN”) offer some great long-term investment opportunities, as they are benefiting from the shifting of trade flows and manufacturing bases as geopolitical tension persists between the U.S. and China. Similarly, Japan’s evolving corporate governance and shareholder attitudes make it an intriguing market for long-term investors. 

Additionally, we find relative value in small caps within international markets. Historically trading at premiums, small caps now offer attractive valuations compared to their large-cap counterparts, presenting opportunities for savvy investors. 

What are the greatest challenges that you face and why?

As contrarian investors, one of our greatest challenges lies in distinguishing between short-term market fluctuations and long-term business fundamentals. Investing in companies when their stock prices are weak demands a thorough understanding of whether issues facing the companies are transient or indicative of deeper, longer-term challenges. This judgment requires not only a comprehensive understanding of the companies themselves but also insight into broader industry dynamics and macroeconomic trends. We focus on companies with improving long-term fundamentals and avoid those with structural problems such as technological change and shifting customer demand. As investors, we have to test our assumptions all the time.

What keeps you up at night?

Of course, we worry about the geopolitical landscape, which currently appears to be at greater risk of descending into a global crisis than it has in a long time. Tensions between nation states also lessen global co-operation on a host of other critical issues such as combating climate change, controlling nuclear proliferation and biological technologies, and managing artificial intelligence. But fundamentally, we are optimists, and we focus on what we can control. That means owning great businesses that can adapt to change because they are well managed and financially sound.

The views and opinions expressed above are of the interviewee only, and do not/are not intended to reflect the views of EisnerAmper.