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Forbes Financial Round Table: Audrey Kaplan AUDREY KAPLAN: Let me just start by telling you a bit about our current views on the U.S. economy and then I’ll speak more about the international picture.
We look very long term, and the leading economic indicators, are continuing to show positive growth for the rest of this year, 2007, and also into ’08.
If you look at the components of the composite indicators, there are one or two such, as housing, that are not positive. But overall the composite is positive. And the service part of the economy is growing strongly with about 3% GDP growth.
We’re not expecting interest rates to move very much or Fed rates to move tremendously. We’re expecting them to stay constant. Our U.S. corporate earnings growth forecast for the year is 8% to 9%.
That contrasts with the international outlook, where we’re expecting corporate earnings, excluding the U.S., to grow 10% to 11%. And emerging markets profit growth to be even higher than that – maybe 11% to 13%.
So while valuations for the S&P 500 are reasonable, we do expect it to appreciate 10% from here over the next year because of the earnings growth of 8% to 9%.
But what do we expect long term, particularly for global growth? Global growth is being led by the industrialization of emerging markets. It has been for the last four to five years and our GDP forecast for the world, excluding U.S. growth, is 4%. That’s favorable compared to U.S. GDP growth.
There’s a lot of competition among U.S. companies to be innovative and to increase productivity. We are seeing that several international companies have a very good history in those areas of successful innovation and they continue to contribute to feed demand from developing markets. This has been responsible for a large percentage of the global growth over the past few years. There’s a lot of worldwide demand for innovative products. So, investors need to hold in their portfolios international companies that are supplying products to meet the growing demand from emerging markets. How can you be successful in international investing?
What we have found from our research is that it’s very difficult to compare a Japanese financial firm like Nomura Securities (NMR) to Deutsche Bank (DB), to DnB in Norway, or to other international finance firms.
Based on our experience and our research, when you have a diversified portfolio, a lot of the return attributed to any stock is due to country allocation. So, to be successful at international investing, you need to have a good country allocation process.
We estimate that 80% of the return on individual companies in a well-diversified portfolio is due to what country that stock is listed in. So, therefore, you need to get your country allocation process correct in order to have a successful international strategy. We’ve been doing that at Rochdale since the inception of the fund in 1998.
Some of the countries we currently favor: in Europe, we favor Germany and Italy. Germany continues to go from strength to strength. The economic indicators in Germany are all very strong. Valuations are reasonable, despite 75% appreciation in the last three years, with 30% upward revisions to corporate earnings. So, we think it’s still a good market for investing.
In Italy, the story is more valuation driven. It’s very cheap right now compared to other worldwide markets. It lagged the other Euro-zone economies. There are a lot of good stocks there that are producing innovative products and that are exporting heavily into Asia.
Other countries we favor in Asia are South Korea and Taiwan. Particularly South Korea is both a value story and a growth story. Growth within the export industries is very strong. 30% of earnings revisions are upward revisions. And that’s the highest level over the past year.
Taiwan has technically been disappointing in the last year. But we feel it’s due for a reversal. Again the demand is strong from China for Taiwanese products. The consensus indicators for GDP growth are 4.2% in ’07 and 4.8% in ’08. So the trend growth in Taiwan is strong.
Those are some of the countries that we recommend looking to for investment opportunities if you are looking to add international assets to your portfolio.
WALLY FORBES: Thank you very much, Audrey. John, would you go next?
Next: Forbes Financial Round Table: John Rutledge
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