Foreign stocks have lagged U.S. equities in recent years, putting overseas stocks at attractive valuations compared to their U.S. brethren.
We spoke with Emily Leveille, a portfolio manager at Thornburg International Growth fund (TIGAX), to get the lay of the land for foreign stocks.
Recent declines in U.S. inflation and the dollar provide a strong backdrop for foreign markets, she said.
She’s particularly enthusiastic about China, anticipating a rebound from its covid-influenced economic slump. Leveille also likes Europe, as it has escaped recession. Her favorite industries include semiconductors and beauty.
Here are her comments, including several stocks she likes.
TheStreet.com: What’s your investment philosophy?
Leveille: We look for growth at a reasonable valuation. We look for resiliency and optionality -- the room to do more things.
We have three types of companies. First are ones that have the fastest growth, such as software. These are companies at the earliest stage.
Second are great industry leaders, such as e-commerce and pharmaceutical companies. They generate good cash flow.
Third are the most conservative companies – consistent growers with the lowest risk. This includes consumer staples and beauty companies: defensive stocks.
[As of Dec. 31, Thornburg International Growth’s top 10 holdings included foods giant Nestle (NSRGY), pharmaceutical titan AstraZeneca (AZN), and luxury-goods stalwart LVMH Moet Hennessy Louis Vuitton (LVMUY) .]
TheStreet.com: What’s your outlook for foreign markets in general this year?
Leveille: The setup may be favorable. Foreign markets have outperformed the U.S. since the end of September, when the dollar peaked and inflation began to moderate in the U.S.
[A sliding dollar helps attract U.S. and other dollar-based investors to foreign markets by making investments there worth more in dollar terms.]
If you think [the trend will continue for inflation and the dollar] and that the Fed will slow its pace of rate increases and eventually pause, that’s an attractive setup for foreign companies.
Thornburg Investment Management/TheStreet
TheStreet.com: What’s your outlook for emerging markets?
Leveille: There are attractive ones there. The reopening in China is the most exciting emerging-market story this year. China was in covid lockdown from 2020 until just recently. That repressed demand and created savings.
There’s been an accumulation of household savings. Certain industries are primed for growth, such as Chinese tourism abroad and domestic consumption. The easing of supply-chain disruption creates opportunities for foreign and domestic companies operating there
TheStreet.com: What’s your outlook for developed markets?
Leveille: There was an expectation that because of the Ukraine war, Europe would struggle and possibly have a severe recession. But with a warmer winter and the ability to get gas elsewhere [than Russia], the worst scenario hasn’t played out.
Inflation numbers have moderated there, too. It’s more of a soft landing than people expected. European stocks could keep outperforming the U.S.
TheStreet.com: Are there any sectors you like in particular?
Leveille: The semiconductor industry remains cyclical. There was a correction last year. It looks like that’s not completely over. But these are high-quality businesses. There’s an explosion of data and connectivity, [which will help them], and a high barrier to entry.
[Thornburg International Growth’s No. 2 holding as of Dec. 31 was Taiwan Semiconductor Manufacturing (TSM)]
I mentioned software. There has been a reset of valuations and expectations. There’s a shift to the harvesting part of the cycle. We might see more consolidation.
Luxury companies, such as LVMH, have been remarkably resilient throughout the covid crisis and afterward. They have sustained their pricing power.
The beauty industry has had consistent growth for hundreds of years in the mid-single-digit percentage range. I don’t see any reason why that should change in the next 100 years. [Thornburg International Growth’s No. 15 holding as of Dec. 31 was beauty mainstay L’Oréal (LRLCY) .]
E-commerce, payments and digitization are other areas. A lot of them really suffered last year. But they have incredibly good business models. The time to shine will come for them again.
[Payment mainstays Mastercard (MA) and Visa (V) were Nos. 13 and 14 in the fund.]
TheStreet.com: Can you talk about another stock you like?
An e-commerce company that has sold off: MercadoLibre (MELI). It’s the largest e-commerce platform in Latin America. They have been investing in the last 15 years to be the best. They are the lowest cost provider of a lot of products because they have invested in technology and logistics.
The author of this story owns shares of Mastercard.
