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John Norris (00:30):
Well, hello again everybody. This is John Norris at Trading Perspectives. As always, we have our good friend, Sam appointment. Sam, say hello.
Sam Clement (00:36):
Hey John. How are you?
John Norris (00:36):
Sam, I’m doing fantastically. Thank you for asking. I hope that you’re doing well. You know, Sam, obviously, everyone’s been talking about the election last week, still have results coming in, believe it or not, and it looks as though it’s a clear sweep of the three sort of levers of power in Washington for the Republican party. And while everyone wants to talk about that and whether or not you are despondent or whether or not you’re exuberant, we still have to ask the question, is the United States going to be the best possible investment for international investors over the next four years?
Sam Clement (01:10):
Well, that’s kind of what we have to do is we have this new info and it’s okay, what’s next? What do we do next where is going to work well and where’s not going to work well. Not a lot of time to just sit around and think about what happened last week.
John Norris (01:24):
Well, and the thing is, there are a lot of people throughout the country who would sit there and say, my gosh, boom times are here again and we’re going to grow this bad boy like nobody’s business, other people that think it’s just going to be death and destruction, and the truth is always going to be someplace in the middle. But even more importantly than that, I would’ve argued that despite the election last week, the United States was still going to be an attractive place in which to invest money. Very much so. Moving forward, is it going to be? For me that’s not necessarily the question as much as who’s better. And that sometimes in a very non-politically correct, I’m sure of it expression, that’s for my age, it’s really not that big a deal. And the land of the blind, the one odd man is king, even at its worst, the United States still in a lot of ways represents better value for global investors than I’d say the remainder of the G7 and perhaps even much of the emerging markets.
Sam Clement (02:21):
And you’re spot on that so much when we’re talking about investing international versus domestically is down to a relative gain. The currencies are almost purely a relative gain. I mean, it’s how are you doing versus other countries and interest rates and getting into the weeds. So that’s really what the focus is on a lot of it, and especially this post-COVID world that we’re still, I would say still navigating through with the economic responses of different countries post-COVID, getting this haves and have nots, and it at least feels wider than it may have been at previous times.
John Norris (02:58):
Well, I think you’re probably right and doing what we do for a living, there’s always a talk of reversion to the mean, and every time we say this time is different, there’s not going to be a reversion to the mean. You generally find out that, yeah, well maybe you were wrong. Maybe this time isn’t as different as we thought it was going to be. And the United States has just absolutely clobbered the remainder of the so-called developed world or the western world over the last decade that if you take a look at the situation and all that, you would go, of course there’s got to be some type of aversion to the mean. This always happens. However, it’s been 10 years, and when you take a look into a crystal ball, take a look at the tea leaves. I don’t know if you’re a shaman and you’re looking at entrails of the animals that you just… in any event, it’s hard for me to make a solid case for any other country relative to the United States in the developed world, not just on absolute, but on relative growth rates. And Sam, tell me if I’m wrong, but I tell you what, even more than that, give me another developed economy that is poised for more rapid economic growth. I’m talking about major economy, not necessarily, okay, smaller economy, even as small as Singapore or Hong Kong. Those are major economies. But take a look at the G7, Australia, New Zealand. Just tell me which one’s going to poise for greater growth than the U.S.?
Sam Clement (04:19):
Well, it’s hard to even trying to remove our U.S. bias, I would say, it’s kind of hard to have a better answer. I mean, we’ve talked about it a little bit before in the sense that the largest companies on earth, the fastest growing companies on earth, these new innovative companies that have popped up over the last five, 10 years are almost exclusively, for the developed markets, in the United States. You look at… Germany’s a big one. I mean, some of these, especially western European countries. The economy is built on old economy stuff, and there’s not anywhere near that same level of innovation. The top 50 companies in the DAX, the German indices, they’re all 50, a hundred plus years old.
John Norris (05:09):
Yes.
Sam Clement (05:10):
You don’t have that same level of innovation, and this is a broad statement, but that you do in the United States.
John Norris (05:18):
Well, I would say that maybe there’s some folks at Taiwan Semiconductor yelling at you right now as well as ASML over in the Netherlands. And I would say, Hey, is Sam truly directionally wrong? And I would say absolutely not because you take a look at what’s happened in the global markets. Take a look at the innovations that we’ve seen, the changes in goods and services, the changes in technologies, how we live our lives and conduct business. And really since the beginning of this century with a couple of exceptions really have been dominated by American firms. And a lot of that is just due to the inherent nature of American society, perhaps more willing to take risk than in some of the G7, plus or two, more willing to take risk, arguably more entrepreneurial and less hindrances on business. But when I take a look at Japan, I take a look at Canada to a lesser degree, take a look at the United Kingdom, Germany, France, Italy, and I’m going, which one of these G7 countries is more innovative, more poised, more rapid economic growth, isn’t more dysfunctional than the United States and I can’t come up with a single one.
Sam Clement (06:29):
Well, and you hit on something that I think we should expand on being the general, the risk-taking nature of the U.S., the U.S. as a whole. I mean, I’ve mentioned this before. I mean, there’s been polls that show that over 90% of Americans think it’s a great idea to start a business and in other developed countries, that’s oftentimes in the teens and twenties. In Japan, it’s in the single digits. I mean, it’s almost a uniquely American thing to want to start businesses. And so that alone, when you’re talking about investing, sure there’s going to be more growth potential when you have more people attempting to start a company.
John Norris (07:12):
Well, sort of along the same lines, and the thing about just general risk taking, which entrepreneurialship clearly is in my estimation. Some years ago, it’s been a while. I mean, that’s my caveat out there. Some years ago I did a little bit of research on the weighting that equities have in investment portfolios in various countries, primarily OECD countries. And what I found was with the exception of Australia, maybe Hong Kong and Singapore… In the United States, equities make up a much larger percentage of the overall allocation than they do in virtually the remainder of the OECD, which suggests that American investors and, by association, the American society as a whole, is much more willing to take risk than really anywhere else on earth.
(08:06):
And so when you take a look at that, take a look at the amount of people that want to have equities and the people that want to start a business think it’s a good idea to start business. And then just take a look at governmental trends as screwed up as we are. And demographic trends, although we are not at replacement right now in terms of our birth rate, it’s still all favors the United States. Not to disparage anywhere else, but take a look at how divided we think we are here in the United States. Canada, Trudeau’s approval rating is, what, in the twenties?
Sam Clement (08:38):
It’s not great.
John Norris (08:38):
It’s not great. Take a look at what’s happened in the UK recently. They got rid of Sunak brought in Starmer and Starmer’s popularity ratings have plummeted like a down in the thirties from seventies, about two months ago. Now back down in the thirties, the government in Germany recently collapsed. Schultz, take a look at France, same thing’s happened in France. And when you take a look around, heck in Japan, I don’t even think they know who their next prime minister is going to be. And the other one with Abe was killed a few couple of years ago by a lunatic, which leaves us to Italy. Meloni, who seems to be the lone wildcard out there, not necessarily wildcard, but the lone country out there, which seems to be a little bit more unified, a little bit more poised for some level of growth, might be Italy. But Italy’s population has been declining. It’s got headwinds on it. Lots of headwinds on it. But if Italy is your next best hope in terms of just poise for growth, unification moving in the right direction, if that’s it in the G7, almost by default you have to go back and say, Hey, I’m over with the United States again.
Sam Clement (09:46):
And that’s been the case for a while now. I mean, we’ve seen U.S. really do well against almost any other country that’s not been unique. And we’ve seen it, again, go into the post we’ve seen U.S. GDP, it’s above trend again. I mean that’s already pretty unique compared to most of these other countries. We’re seeing the economic headwinds we have here are nothing in comparison to what we’re seeing in some of these other countries. What we’re seeing in the U.K., what we’re seeing in Canada, France, Germany, what have you. We are in much better, I would say we’re in a pretty good spot, even not comparing it relatively. And we’re in a great spot when you compare it relative to our competitors.
John Norris (10:29):
I would agree with you on that. And so obviously we’ve spent most of our time talking about developed markets, and I don’t think that’s really much of the debate. I think even people in Western Europe would probably say, yeah, the United States is probably a better bet in terms of my investment portfolio than we are here domestically, I would imagine so, getting some of the nationalism aside. But there’ll be people out there saying, oh, come on, take a look at the emerging markets. I mean, almost by definition because they’re coming off of a lower base, they offer the potential for far greater growth in the United States, and as such, should they be a larger allocation in people’s investment portfolios?
Sam Clement (11:13):
I mean, stuff like that is a tailwind, right? I mean, that’s been a tailwind to the Chinese economy, this previously booming population. I mean, that just leads to economic growth almost by itself. But there’s also a lot of headwinds to emerging market countries. I mean these things that the rule of law is questionable at times. The manipulation of currency is a big thing in emerging markets. We could have a whole podcast episode just talking about the headwinds of emerging markets. And so you have to be, in my opinion, a lot more tactical with where you’re investing in emerging markets because the story is unique almost to each individual country, more so than it is western Europe’s kind of western Europe. In a lot of ways, that is not the case when you’re talking about emerging markets. The story from Vietnam to India to China, which may be pretty close geographically, is vastly different between the three.
John Norris (12:11):
Well, I would agree with you on that. However, when you take a look and break down each individual emerging market economy, you’ll find that your number of investment opportunities kind of evaporates.
(12:22):
I mean, there just aren’t as many of them in a country like say, Vietnam. I mean, God forbid Cambodia starts growing at 10%, or Ethiopia has been growing at 10% for a while now, despite the drought and what have you, it’s just coming off such a low base. It can grow at such rates. Obviously you have India out there, which should be poised to have a wonderful century in terms of economic growth if they can figure out just how to structure their society in order to take advantage of the potential that they have. But then the big question mark out there is, well, what about China? And you mentioned it, they’ve got some significant demographic headwinds.
Sam Clement (13:01):
What was once a tailwind is now a massive headwind.
John Norris (13:04):
It’s a massive headwind. And I will go out on a very short limb, or actually a long limb, I’m not sure which one, and say that we cannot count on China continuing to grow anywhere close to 10% maybe for the remainder of my career.
Sam Clement (13:21):
I mean, maybe half of that.
John Norris (13:23):
I would say half of that would be actually pretty good, very much towards the upper band of where I think Chinese growth is going to actually happen. I’m thinking probably two to 3% is a little bit more realistic. So when you take a look at all of these things and forecast for Chinese economic growth and just talking about the emerging markets in general, you have to remember one thing, Sam, and you and I know this. When you take a look at a lot of emerging markets, exchange traded funds or mutual funds or just the way that the average investor would invest in the emerging markets, what you are actually investing is a huge slug in the people’s republic of China.
Sam Clement (14:01):
And China derivatives.
John Norris (14:02):
And China derivatives. Because when you take a look at it, you’re going, oh my gosh, you buy, and this is not a comment on any of these ETFs other than to talk about their asset allocation – Take a look at the ETF VWM or EEM, some of the larger, more commonly found in investment portfolios, emerging markets, exchange traded funds. And what you’ll find is the PRC, directly, is anywhere in the twenties and mid twenties in terms of direct exposure to Chinese companies. And that doesn’t include companies that do the predominance of their business with the People’s Republic. So you’re total exposure is easily in the 30% right there. And so when you think about that going, okay, China should have slower economic growth moving forward, do I want all of this? It still might be greater than the United States, two to 3%, but then you have to ask yourself the questions, what about the currency? What about the rule of law? What about the adherence to strong individual property rights? And those are enough question marks out there. You alluded to it not just in the PRC, but do they have it in Vietnam? Do they have it in Indonesia? Do they have it in much of Eastern Europe? And the question is maybe in Eastern Europe, but you got some demographic headwinds there and you start asking yourself going, I don’t know. Does Argentina have those things? Does Brazil have those things? Does even Mexico have those things with Amlo’s almost handpicked successor in there? And you kind of go, I don’t know. There’s enough question marks out there for me to think that again, the United States still looks good on both an absolute and relative basis.
Sam Clement (15:45):
All of that is why you can’t just look at the expected growth rate of the country. I mean, everything is a risk reward, right? I mean, you are having more risks that are priced in and the higher growth is priced in. So you have to kind of piece all the pieces together before you can say, Hey, yeah, of course some of these emerging market economies are for probably decades going to grow at higher rates than the United States. That alone does not make it a better investment.
John Norris (16:13):
Well, you’re absolutely right. And I think with no better example than perhaps Venezuela, when Chavez came into power, I mean clearly a sort of disjointed sort of economy spent a ton of money that the country truly didn’t have, and growth rates looked spectacular. Same, you could say the same thing with that Morales down in Bolivia, although not as many opportunities to invest down there, come in, gee whiz, spend a bunch of money, the government doesn’t have; overall poverty levels decrease. And you think that’s absolutely fantastic economic growth until there isn’t any growth. And as you see at the absolute opposite half. So you do have to take a look, not just at current growth rates when you’re focused on the emerging markets, but then also those intangibles, not necessarily intangibles, but you have to take a look at those other things like, Hey, are they going to pay their debt back?
Sam Clement (17:03):
Sure.
John Norris (17:03):
I mean, what are the structures in place, or the institution that’s in place to ensure that this economic growth can continue for a long period of time? And that’s where again, I keep coming back that: despite all of our problems here in the United States, despite how divided we are on a lot of societal issues, it still makes sense.
Sam Clement (17:22):
Well, and you kind of hit on this, but these emerging economies are a much smaller ship than the US economy is. I mean, our ship is so large that we can’t really turn it on a dime.
John Norris (17:35):
No.
Sam Clement (17:35):
It takes a large long time to really change our economic trends. And we’ve seen that before. That is volatility in its own right in these economies that something can happen, an election can happen. Elections here, have policy changes, but they don’t change the economy on the dime. That can change overnight. We’ve seen that in Argentina. We’ve seen that in Venezuela, a lot of these economies where all it takes is an election to go another way or all it changes is a dictator to change his mind on something to drastically change the economy. Sometimes for better, but a lot of times for worse.
John Norris (18:11):
And this is important because if you take a look at a lot of firms out there, a lot of money managers will have the allocation to international roughly in line with where global market capitalizations are. And that is the math. That is what the slide rule, the abacus the calculator would tell you that you should do. However, it’s creeping in the back of a lot of people’s minds. It’s kind of like, should I really have 35% in international? Should I really have this amount to emerging markets? And if you did just the simple math, the simple, this is what you should do, this is what the Callan and RC consultants and all that stuff would tell you that you should do. You’ve missed out on a ton of money over the last decade. And while again, if I mentioned about reversion to the mean at some point it might happen, but focusing on a very sort of medium term result over the next, I’d say four to five years, I think it’s very difficult to make a case, a strong case where I’m going to sit there and say, we are going to go, we’re going to take our overall equity, I mean international allocation from 10% or less, which is minimal by a lot of people’s standards, and take that to 20 or 30.
(19:23):
I can’t imagine what would have to happen in the United States for me to sit there and say, I think that’s a good idea.
Sam Clement (19:29):
People talk about this time being different with how much the domestic markets here, the U.S. market has outperformed international, and part of me says maybe this time is different because things are different now. I mean, things are different in the sense that these U.S. companies are not just sourcing the revenue from the United States anymore. I mean, you look at the S&P 500, it is almost a global basket already in terms of revenue. I mean, I think close to 40% of revenue comes from outside of the United States.
John Norris (20:03):
So what you’re saying is you can really kind of play international growth by simply investing in U.S. companies.
Sam Clement (20:08):
At least more so now than you used to. I mean, the currenciy is a big part of investing in international markets. I mean, that is a massive part of it. That’s our conversations. A lot of internationals start with where we think currencies are going. So you’re kind of getting that at least more so now that trend is continuing, that globalization trend is continuing for these companies and more and more revenues coming from outside the U.S.. So it’s like maybe that is different. So is it different about needing to have as much direct exposure?
John Norris (20:41):
And that brings up a very good point because we take a look at some major multinational and just picking on Apple, which I would say we own it throughout our client’s accounts. And I’m not trying to talk our book, it’s a significant holding of ours, but you take a look at Apple and I think it was something like 35, 40% of its revenues from outside the United States, if not more than that. So what happens when, let’s say the dollar were to fall five, 10%… ordinarily that’d be good for international investments. However, it would also be great for investment in Apple because they would be able to translate their foreign earnings back into ever more dollars when they’re reporting, which would be good for their overall corporate profitability because they get so much of their revenue from overseas. Conversely, if you were to invest in say, an international company like a Royal Dutch Shell or even a British Petroleum, since they get so much of their revenue from the United States, a strong dollar actually helps their earnings when they report back into the Euro or into the pound. And so when you take a look at all this stuff, you’re kind of going largest U.S. companies actually have a decent amount of international exposure. It benefits them for a weaker dollar. And then why wouldn’t I just go ahead and continue to invest in the United States… all the more so when you realize that the countries that benefit from strong economic growth, those international companies, they get hurt when their currency depreciates.
Sam Clement (22:12):
Yep. That’s my point.
John Norris (22:13):
So when I take a look at everything crystal ball, and I’m sitting here staring at the crystal ball on this table where we’re recording this podcast, Sam, I’m going to tell you that unless something dramatic happens and I’m staring at it like I’m almost cross eyed, the crystal ball that is, not Sam. When I stare at the crystal ball, I’m going, Sam, I don’t see anything changing with our or significant underweight to international investments for a very long period of time. And right now we don’t have any direct emerging market exposure and that hasn’t hurt. At some point, we might want to change that. However, we are going to have to be far more granular than just simply putting something in a huge basket of emerging market countries and what have you, and really “focus more granularly” is an investment in an Eastern European fund better than a global one, or is an investment in an Indian fund or Indonesian fund better than, again, a global one. That’s how we’re going to have to play emerging markets moving forward. Very country-specific.
Sam Clement (23:15):
I agree.
John Norris (23:16):
Alright, guys. Thank you all so much for listening. If you have any comments or questions, please by all means, let us know. You can always reach us by dropping a line at or you can leave us a review on the podcast outlet of your choice. As always, if you’re interested in reading more or hearing more of what we got to say or how we think, you can go to oakworth.com, O-A-K-W-O-R-T h.com, take a look underneath the Thought Leadership tab and find links to all kinds of exciting information, including previous Trading Perspectives podcasts, links to our newsletter / blog called Common Cents, comes out every Friday, and then also links to our quarterly analysis called Macro & Market, all the individual pieces there as well as the entire magazine. And last, but certainly not least, all the good stuff that the Advisory Services group headed up by Mac Frasier puts out there, that’s also underneath that tab. With that being said, Sam, anything else to talk about on this very exciting topic. That’s all I’ve got. That’s all I’ve got today too. Y’all take care.