(PUB) Investing 2015

April 2015

Morningstar FundInvestor

17

going to come down, and they are going to come down more for the leveraged companies, for the cyclical companies. They are going to come down for the quality guys, but much less. So, today is a time when we think, on a P/E basis, they should be trading at a premium because their earnings are less at risk, but they are actually trading at parity or a slight discount. Benz: International is maybe a slightly more opti- mistic picture. Let’s start by talking about your outlook on developed foreign stocks. Inker: Non- U.S. stocks look better than U.S. stocks; that’s about the strongest thing I can say for them. They look to be the place to be. Unfortunately, even there, they’ve done very well since the market bottomed in 2009 , and the P/Es are pretty high. If you look at Europe today, it’s trading around 20 times earnings. The good news relative to the U.S. is that at least their earnings today aren’t near the peak. Because the economy hasn’t been that strong, profit margins look kind of normal. And so, we don’t think that these markets are cheap, but we do think that they are priced to deliver returns above inflation. Whereas, in the U.S. , I was talking about how the leveraged companies and the cyclical companies have really benefited from widening profit margins, that has not been true at all in a place like Europe. What we find is, in Europe, we’d much rather buy the traditional value-type companies — the dopey compa- nies that, in general, have some problems to them. They are trading at pretty good discounts, wider than normal. As a result, we think if you’re going to be in Europe, we think you want to be in the value stocks. Benz: How about value stocks in developing markets? It sounds like you think they’re the most attractive pocket of the entire market universe today. Inker: It’s really interesting how investor attitudes toward emerging markets have changed over the past few years. Going into the financial crisis — and even a couple of years out of the financial crisis — the as- sumption was that emerging-markets economies grow much faster than the developed world. This is the place to be. If you’re going to invest in stocks, you are

a growth investor. And if you are going to be a growth investor, invest where the growth is.

People were very excited about them. The valuations rose accordingly. But the last three or four years, people have been pretty disappointed with what’s happened in emerging, and the valuations have really come down. We are generally contrarians: Our view is that whatever is going on will probably cease and the future will look more normal. And if we got a return to normalcy in emerging markets, it would actually be a pretty good thing. In particular, for some of the value stocks within emerging — which have seen their profit margins come in in the past two years — we think there’s the potential for P/Es to expand and, in some cases, for profitability to improve. So, it’s one area where we actually think achieving low-double-digit nominal returns is possible. œ

Contact Christine Benz at christine.benz@morningstar.com