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Global investing: Look overseas

With U.S. equity valuations higher than their historical average, now’s a good time to look for high-quality companies across the pond.


Date: December 28, 2015

For the last several years, investors have been clamouring for American equities and U.S. dollars. While that’s been a boon to domestic portfolios so far, globally focused Canadians may need to look further afield for opportunities in 2016, says Patrice Quirion, Lead Manager on Fidelity Investments’ Global Concentrated Equity Fund.

“There’s been one very big trade that’s been happening over the last four years,” he says. “That’s been to love developed markets – especially America – and be long U.S. dollars versus all other countries.”

As usually happens when a particular part of the market gets all of the attention, valuations in that area increase. The U.S. market is trading about 18 times earnings today, which is a 30 per cent or so premium to historical averages, he says.

Mr. Quirion, who calls himself a quality-at-a-reasonable-price manager, likes to buy superior operations with predicable and durable business models that can compound earnings long-term. He typically finds these kinds of companies in strong developed nations, and in the consumer staples and health care sectors.

With other investors now scooping up these more defensive kinds of stocks – companies that he can confidently say will still be around in a decade – his typical areas of investment have become more expensive, he says.

While he still likes America generally, and is finding inexpensive opportunities there in financials and in more cyclical sectors, like industrials and energy, he’s been keeping a closer eye on European and emerging-market stocks.

Improving Europe

At the end of last December, Mr. Quirion had 29.5 per cent of the assets in his fund allocated to Europe. It’s now up to 33.3 per cent. He’s made that move, in part, because European stocks are still somewhat cheaper than U.S. ones, but he also points out that the region is finally improving.

When it comes to economic recovery, Europe is still a few years behind the United States. America started its deleveraging process in 2009, he says. It takes a few years before those impacts are felt and the growth process can begin, which is what we’re seeing today.

It took until 2011 for Europe to begin its deleveraging process, and it’s been working that out ever since. The releveraging process, where credit is more available and banks begin lending again, is finally just beginning.

An increasingly accommodative Central Bank policy will also help buoy European stocks, and even more so since the Federal Reserve increased its interest rate on December 16, he explains.

“If [the ECB] keeps being accommodative next year, then that will support growth and higher valuations,” he says.

Dipping into developing nations

Although Mr. Quirion’s emerging-market exposure has declined from 9.6 per cent to six per cent in 2015, he may be willing to increase that allocation next year, he says, though he’s by no means going all in.

The Fidelity manager points out that GDP growth isn’t a driver in emerging markets, unlike in other parts of the world. This geographic sector is] still in the deleveraging process, so economic expansion will continue to be slow.

What will help emerging-market stocks is an eventual uptick in oil prices, which could start happening later next year, he says, and a reduction in interest rates. Many emerging-market countries have high rates – much higher than Canada and America – in part because these nations have had to support their currencies or have had to reduce inflation.

There will come a time, though, when their central banks won’t have to increase rates any longer, and they may even begin reversing course.

“We think this will take place at some point in 2016, and that will bring at least a temporary rebound in some of these emerging markets,” he says. “It’s becoming riskier to have no exposure to these countries.”

An eye on Canada

It’s always important for investors to own a globally diversified portfolio – since there are so many sectors that aren’t represented in Canada – but what about our own nation?

As a global manager, Mr. Quirion is allowed to invest anywhere, including in the Great White North, but he has just 3.7 per cent of his assets in our country.

While he’d always hold less in Canada than in other places — our country makes up a small percentage of the global equity market – he is concerned about how oil prices are impacting the economy.

However, he’s still keeping an eye out for opportunities and if the commodity situation changes, he may add more of our country to his portfolio, he says.

While the locations of Mr. Quirion’s holdings may change, he’s still focused on one thing: buying high-quality operations. He’s looking for slightly out-of-favour businesses with long-term potential, and every region has at least a few of these companies.

“All my effort goes into finding these companies,” he says. “And while a company may be slightly out of favour because of a geopolitical issue, I still want to get a good business at good valuations.”

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