The cold, hard truth is that global markets are no longer powered by the United States, says Audrey Kaplan of the Federated InterContinental fund (symbol RIMAX). Kaplan and comanager Geoffrey Pazzanese spend much of their time scouring the globe for countries with the best investing opportunities. Once they zero in on a particular country, the duo look for growing companies that are trading at a reasonable price. That strategy seems to be working: Over the past five years, the $1.1 billion fund has gained an annualized 18 percent, ranking it among the top 2 percent of funds that invest in large, growth- and value-oriented foreign companies. Recently, Kaplan talked to U.S. News about where to buy in Asia (South Korea), what makes the eurozone economies attractive, and why international investors are facing the best investing opportunities in seven years. Excerpts:
Are we headed into a global slowdown?
We're in a slowing environment; I like to say "moderating." Growth was very strong in 2007 at 4.4 percent in major foreign economies. Our 2008 forecast for U.S. GDP growth is only 1.6 percent, but for major foreign countries, it's 3.2 percent. There are still regions that will grow, but they will grow slower than they have in the past couple of years, which was unsustainable. But if the U.S. slows to 1.5 percent or slower, that's a headwind. You've got to make sure you're looking for growth where you can get it and where it's trading at a fair price.
It's interesting that people are very concerned about markets slowing, because this is the best opportunity in seven years for international investors. When you have pullbacks, you have opportunities. What happens is that most people buy on the high side, and then they sell low. This is the best pullback in seven years, so it's a good time for long-term investors to be dollar-cost averaging and putting their money to work.
Where are the bright spots?
Our favorite emerging region is Eastern and Central Europe, where we're excited about opportunities in Poland, Hungary, and Austria. Poland, for example, has grown its exports by 33 percent over the last year. Ten years ago, the common currency was launched, and that means products are flowing more easily in Europe from country to country. It also means that corporations are becoming more productive, and pension plans are more consistent across the country. A company we own in Eastern Europe is PKO Bank Polski. It's Poland's largest bank by assets, and it's benefiting from a strong position in the Polish market and in the region. The mortgage market hasn't been in the frenzy that the U.K. and Spain saw, so there's much less of an impact.
What's your outlook for developed Europe?
If you have to choose one region to be overweight in (excluding emerging markets), we'd say Europe is a good market right now. Consider Germany, where the growth forecast for the next 12 months is about 13 percent, and yet it's trading at a P/E of 10, when it normally trades at 14 to 15 times earnings. The market is discounting growth to decline 40 percent, and we think that's too steep.
Looking at the last five recessions in Europe—going back to 1970—we have not found a time that companies in Europe are as strong as they are today, going into a recession. By country, our largest holding is in German shares. One that we like is BASF Group, a maker of specialty chemicals, which plays an important role in looking for solutions to climate problems, energy efficiency, and nutrition. Recently, they made a sun-reflective coating that keeps cars 36 degrees cooler than normal. Also, Daimler is an infrastructure play we like. It has been trading off because everyone thinks of it as a car company, but it's also the world's largest supplier of commercial trucks, which are in demand from Asia, eastern Europe, and Latin America.
Aside from Germany, our next largest positions in Europe are in French and Norwegian shares. We're also overweight in Italy and Austria. We're underweight in the U.K. for a number of reasons, one of which is that like the U.S., they're exposed to the mortgage crisis. Not only that, but in general, it's the most highly correlated stock market to the S&P 500. The U.K. tends to move 80 percent of time with U.S. shares.
Where do you stand on China?
We have been underweight in Chinese shares since the first quarter of 2007, after being overweight for five years. Long-term demographic shifts in the economy are favorable, but over the next one to three years, we're having a hard time finding a catalyst for the Chinese stock market. Growth is strong, but it's expensive. Long term, there's obviously good opportunities in China, but at the moment, there are better opportunities in Asia, such as South Korea.