1 00:00:00,080 --> 00:00:12,960 Speaker 1: Yeah, Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane. 2 00:00:13,480 --> 00:00:17,560 Speaker 1: Daily we bring you insight from the best in economics, finance, investment, 3 00:00:18,000 --> 00:00:23,520 Speaker 1: and international relations. Find Bloomberg Surveillance on Apple Podcasts, SoundCloud, 4 00:00:23,600 --> 00:00:33,159 Speaker 1: Bloomberg dot Com, and of course on the Bloomberg. Right now, 5 00:00:33,200 --> 00:00:37,000 Speaker 1: we speak with David Harrow of Oakmark International. David, it's 6 00:00:37,000 --> 00:00:39,920 Speaker 1: always a joy to speak to you on international investment. 7 00:00:40,080 --> 00:00:43,440 Speaker 1: It was a brutal year for international and e M 8 00:00:43,560 --> 00:00:47,240 Speaker 1: last year. How do you recoup this year? It? Sure 9 00:00:47,280 --> 00:00:50,919 Speaker 1: it sure was. But fundamentals have a way of asserting 10 00:00:50,960 --> 00:00:55,640 Speaker 1: themselves and certainly as something gets overdone on the negative side, 11 00:00:55,840 --> 00:00:58,520 Speaker 1: you do have this return to equilibrium. You do have 12 00:00:58,560 --> 00:01:02,960 Speaker 1: a return to prices that kind of come closer to evaluations. 13 00:01:03,480 --> 00:01:06,160 Speaker 1: And this is exactly what we saw last Year's prices 14 00:01:06,240 --> 00:01:11,040 Speaker 1: fell while earnings were okay, and so you saw certain 15 00:01:11,120 --> 00:01:17,240 Speaker 1: companies and sectors being highly devalued. You saw evaluation compression. 16 00:01:17,959 --> 00:01:20,039 Speaker 1: You just have to wait and be patient because these 17 00:01:20,080 --> 00:01:21,960 Speaker 1: things come back okay. But you have a three or 18 00:01:22,040 --> 00:01:24,480 Speaker 1: five year horizon to understand that. With a bang of 19 00:01:24,600 --> 00:01:28,920 Speaker 1: two thousand seventeen is well, do you find that investors 20 00:01:28,959 --> 00:01:32,520 Speaker 1: still have the hero patients or is it a struggle 21 00:01:32,560 --> 00:01:36,720 Speaker 1: with short termism of investors? You know what some do. 22 00:01:36,920 --> 00:01:40,520 Speaker 1: It really kind of depends on the vintage of the investor. 23 00:01:40,640 --> 00:01:44,880 Speaker 1: If the investor entered our realm and the end of 24 00:01:45,000 --> 00:01:50,720 Speaker 1: twenty seven turn seventeen early eighteen, and then they kind 25 00:01:50,720 --> 00:01:53,320 Speaker 1: of go into this negative year which is like our 26 00:01:53,360 --> 00:01:56,480 Speaker 1: fourth and twenty seven years. Uh, they're not going to 27 00:01:56,560 --> 00:01:58,840 Speaker 1: be so happy and they're not going to be so patient. 28 00:01:59,240 --> 00:02:01,240 Speaker 1: But if they're investor stars who have been with us 29 00:02:01,280 --> 00:02:03,320 Speaker 1: for a while, and if they have lived through the 30 00:02:03,400 --> 00:02:06,400 Speaker 1: various cycles, they know what tends to happen. When we 31 00:02:06,440 --> 00:02:09,960 Speaker 1: have these negative outlier periods, as rare as they are, 32 00:02:10,160 --> 00:02:13,480 Speaker 1: there's a very strong kind of kickback and they usually 33 00:02:13,520 --> 00:02:16,760 Speaker 1: stick around to enjoy that. So then over the period 34 00:02:16,800 --> 00:02:19,880 Speaker 1: of time you get the out performance which were known 35 00:02:19,919 --> 00:02:23,240 Speaker 1: for So David, everyone has this game plan and they 36 00:02:23,240 --> 00:02:25,880 Speaker 1: all agree with you, and then it happens the down 37 00:02:26,000 --> 00:02:28,760 Speaker 1: draft comes and they just don't have the discipline to 38 00:02:28,960 --> 00:02:31,960 Speaker 1: execute the game plan that they believed in. We have 39 00:02:32,040 --> 00:02:37,680 Speaker 1: had three growth scares in this bullmarket now fifteen sixteen, 40 00:02:37,960 --> 00:02:44,239 Speaker 1: and now how do you get investors to replicate your 41 00:02:44,280 --> 00:02:47,680 Speaker 1: game plan? And maintain the discipline in the moment to 42 00:02:47,760 --> 00:02:51,160 Speaker 1: get them to execute. Jonathan that this is a very 43 00:02:51,200 --> 00:02:53,880 Speaker 1: one of the more challenging aspects of my job. And 44 00:02:53,960 --> 00:02:56,960 Speaker 1: what you have to do is you have to be 45 00:02:57,200 --> 00:03:00,360 Speaker 1: in front of your clients and your investors and you 46 00:03:00,480 --> 00:03:04,320 Speaker 1: have to explain and share your thoughts. You cannot hide 47 00:03:04,320 --> 00:03:06,400 Speaker 1: from it. And the worst thing to do as an 48 00:03:06,400 --> 00:03:09,040 Speaker 1: investment manager would be to sell the things that have 49 00:03:09,120 --> 00:03:12,240 Speaker 1: got hit and the worst because because you don't want 50 00:03:12,280 --> 00:03:16,440 Speaker 1: to show that you've owned a stock that drop. That 51 00:03:16,760 --> 00:03:19,800 Speaker 1: is the worst thing that we can do. And often 52 00:03:19,840 --> 00:03:22,640 Speaker 1: in our profession people do this. They'd rather sell a 53 00:03:22,680 --> 00:03:26,680 Speaker 1: losing stock than explain it. And I think we get 54 00:03:26,680 --> 00:03:31,000 Speaker 1: paid a fee to be disciplined and to explain, and 55 00:03:31,080 --> 00:03:33,240 Speaker 1: this is exactly what you have to do. Do you 56 00:03:33,280 --> 00:03:35,880 Speaker 1: have a one off in the Deutsche Bank clears the 57 00:03:35,960 --> 00:03:39,920 Speaker 1: market and clears their headaches, or troubled Italian banks clear 58 00:03:39,960 --> 00:03:43,520 Speaker 1: their markets, clear their headaches with your banking exposure. Do 59 00:03:43,600 --> 00:03:45,840 Speaker 1: you have the mother of all pops coming? I mean, 60 00:03:45,880 --> 00:03:47,640 Speaker 1: do you wake up every day David Hero and say, 61 00:03:47,640 --> 00:03:51,960 Speaker 1: come on, Deutsche Bank, get the pain over. Um? I 62 00:03:52,000 --> 00:03:54,280 Speaker 1: wouldn't sleep so well if we own Deutsche Bank to 63 00:03:54,320 --> 00:03:57,440 Speaker 1: be honest, because I just there's just not enough we've discussed. Yeah, 64 00:03:57,440 --> 00:04:00,360 Speaker 1: but does Deutsche Bank, David Harrow affect Credits East, does 65 00:04:00,360 --> 00:04:04,280 Speaker 1: Deutsche Bank affect BMP? Does Deutsche Bank effect in Tessa? 66 00:04:05,280 --> 00:04:08,760 Speaker 1: It certainly impacts their share price, and it has impacted 67 00:04:08,760 --> 00:04:13,119 Speaker 1: their share price. When Deutsche Bank kinda uh sneezes these 68 00:04:13,120 --> 00:04:16,360 Speaker 1: other banks seem to from a price perspective, not from 69 00:04:16,360 --> 00:04:19,239 Speaker 1: a fundamentals So to that degree, you're right, Tom, when 70 00:04:19,480 --> 00:04:22,359 Speaker 1: if this final um you got to be careful my 71 00:04:22,400 --> 00:04:25,359 Speaker 1: word in here. If the final outcome of Deutsche Bank 72 00:04:25,760 --> 00:04:29,560 Speaker 1: is to emerge, say with Commerce Bank, or to merge 73 00:04:29,560 --> 00:04:34,120 Speaker 1: with someone else, and that kind of settles this survivability 74 00:04:34,200 --> 00:04:38,640 Speaker 1: question of Deutsche Bank. Invariably, that would help the European 75 00:04:38,760 --> 00:04:41,880 Speaker 1: banking sector from a price perspective. It really won't make 76 00:04:41,920 --> 00:04:45,800 Speaker 1: the company's more valuable from an intrinsic value perspective, but 77 00:04:45,839 --> 00:04:48,160 Speaker 1: it will help it from a price perspective. Just from 78 00:04:48,200 --> 00:04:50,400 Speaker 1: thirty five thousand feet Dave, and I encourage you, of 79 00:04:50,440 --> 00:04:52,560 Speaker 1: course to go a lot closer, from a lot deeper 80 00:04:52,680 --> 00:04:54,880 Speaker 1: from from our perspective. In the United States, we always 81 00:04:54,880 --> 00:04:57,920 Speaker 1: look at this valuation gap between the banks on Wall Street, 82 00:04:57,960 --> 00:04:59,880 Speaker 1: the banks on Europe in facts stocks in Europe, and 83 00:05:00,040 --> 00:05:03,720 Speaker 1: stokes in America, and so many people have been burned 84 00:05:03,800 --> 00:05:06,080 Speaker 1: so many times, they now believe that valuation gap is 85 00:05:06,080 --> 00:05:09,600 Speaker 1: evaluation trap, cuts through the clichez for me and trying 86 00:05:09,600 --> 00:05:11,880 Speaker 1: to help us understand the situation a whole lot more clearly. 87 00:05:13,040 --> 00:05:17,159 Speaker 1: The valuation gap technically, is my guess, is a function 88 00:05:17,200 --> 00:05:21,880 Speaker 1: of the higher return structure that US companies generally earn 89 00:05:21,880 --> 00:05:25,840 Speaker 1: over European and European companies of course have greater returns 90 00:05:25,880 --> 00:05:28,400 Speaker 1: than Japanese companies. So if they give a spectrum of 91 00:05:28,440 --> 00:05:32,560 Speaker 1: the returns, the better the return structure, the better, the 92 00:05:32,640 --> 00:05:36,080 Speaker 1: higher the price you're willing to pay. So I certainly 93 00:05:36,120 --> 00:05:40,479 Speaker 1: accept the fact that there should be evaluation gap. However, 94 00:05:40,600 --> 00:05:44,200 Speaker 1: what I would argue is the gap today is too large. 95 00:05:44,520 --> 00:05:48,680 Speaker 1: The gap today is too large because, yes, especially in 96 00:05:48,720 --> 00:05:51,960 Speaker 1: the financial sector, uh, you know, the European banks maybe 97 00:05:51,960 --> 00:05:54,520 Speaker 1: are a couple of turns lower return on equity. That 98 00:05:54,600 --> 00:05:57,359 Speaker 1: doesn't mean they should be trading at ante percent discount 99 00:05:57,400 --> 00:06:00,839 Speaker 1: to US banks. It's just too large. And us the currencies, 100 00:06:00,880 --> 00:06:03,559 Speaker 1: we've been talking about how strong the dollar has been 101 00:06:03,800 --> 00:06:06,600 Speaker 1: so just when everyone's gonna throw up their arms. And 102 00:06:06,760 --> 00:06:09,520 Speaker 1: you know, punt out of European equities is when the 103 00:06:09,560 --> 00:06:12,800 Speaker 1: currency picks up is and when the valuation gap narrows. 104 00:06:13,000 --> 00:06:15,120 Speaker 1: And again my fear is that they'll do it at 105 00:06:15,120 --> 00:06:18,400 Speaker 1: the wrong time. David Harrow, can you explain to our 106 00:06:18,440 --> 00:06:23,039 Speaker 1: global audience the miracle known as the Milwaukee Brewers? I mean, 107 00:06:24,080 --> 00:06:26,840 Speaker 1: really gonna see? Is that came so close? And I 108 00:06:26,880 --> 00:06:31,239 Speaker 1: think next this year nineteen might be the year Tom, 109 00:06:31,440 --> 00:06:33,400 Speaker 1: It might be the year maybe also the year for 110 00:06:33,480 --> 00:06:38,080 Speaker 1: international stocks. David Harroll, keep up the battle. Greatly appreciated 111 00:06:38,080 --> 00:06:46,839 Speaker 1: with Oakmark International. Mr Harrold, Milwaukee, Wisconsin. Thanks for listening 112 00:06:46,880 --> 00:06:51,440 Speaker 1: to the Bloomberg Surveillance podcast. Subscribe and listen to interviews 113 00:06:51,440 --> 00:06:56,680 Speaker 1: on Apple Podcasts, SoundCloud, or whichever podcast platform you prefer. 114 00:06:57,240 --> 00:07:00,599 Speaker 1: I'm on Twitter at Tom Keane before the podcast. You 115 00:07:00,640 --> 00:07:04,000 Speaker 1: can always catch us worldwide. I'm Bloomberg Radio.