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Speaker 1: Bloomberg Audio Studios, podcasts, radio news.

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Speaker 2: Market dominance of the S and P five hundred, leading

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Speaker 2: some investors to look outsewhere Peter Roppenheimer Goment Sax writes

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Speaker 2: in this we believe that there are many companies outside

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Speaker 2: of the US that should be considered as part of

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Speaker 2: a global diversified portfolio and should not be ignored simply

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Speaker 2: because their base and listing location is outside of the

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Speaker 2: United States. Peter Ropenheimer joins, is now for more, let's

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Speaker 2: get straight into this because it's a really important theme.

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Speaker 2: If it's winning, even if it's dominant, should I be concerned?

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Speaker 3: Well, the short answer John is no.

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Speaker 4: I mean, the outperformance that we've seen of the US,

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Speaker 4: which has really been particularly dramatic since the financial crisis,

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Speaker 4: has been entirely based on solid fundamentals the US economy,

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Speaker 4: but most importantly, profits have simply outgrown those of other regions.

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Speaker 3: But as a result of that.

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Speaker 4: Its valuation has risen a lot compared to other parts world,

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Speaker 4: and now we're finally seeing a bit of a narrowing

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Speaker 4: in the relative fundamentals. Actually profits are picking up outside

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Speaker 4: of the US, where the valuations are lower, and we

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Speaker 4: think that the US market can still do pretty well,

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Speaker 4: but there's some great opportunities outside, and diversification makes a

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Speaker 4: lot of sense.

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Speaker 3: And that's true at the sector and the stock level too.

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Speaker 3: The PEP.

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Speaker 2: We can talk about those opportunities in just the moment,

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Speaker 2: but can we also discuss what we're fighting. Are we

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Speaker 2: fighting passive flows that just couldn't care less?

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Speaker 4: Yeah, to a large extent, Look, passive investing has worked

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Speaker 4: very well over the last decade or more in an

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Speaker 4: environment of ever lower interest rates, where bigger companies are

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Speaker 4: becoming increasingly dominant, and the USCD market itself has got

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Speaker 4: the highest share of the world market since the early

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Speaker 4: nineteen seventies. So what's been winning has continued to win

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Speaker 4: and win over time, and that's been a great environment

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Speaker 4: for passive investment.

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Speaker 3: We think that as.

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Speaker 4: Interest rates stabilize at a slightly higher level, they'll come

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Speaker 4: down cyclically, but they won't come down structurally. Returns at

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Speaker 4: the index level are going to be slightly lower, and

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Speaker 4: that's an environment where the opportunity set is more attractive

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Speaker 4: for active managers and also for more differentiation and diversification,

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Speaker 4: and that means across regions, across sectors and styles as well, Peter.

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Speaker 1: When you talk about the case for international I'm curious

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Speaker 1: where you're looking in particular.

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Speaker 3: And whether it's regional.

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Speaker 1: Based or sector based, as you are just noting.

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Speaker 3: Look, it's a little bit of both.

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Speaker 4: I mean, the US has done extraordinarily well, partly because

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Speaker 4: it's had a very high exposure to the growth factor,

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Speaker 4: principally dominated by technology, which has been the winning sector

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Speaker 4: over the last decade.

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Speaker 3: We still really like technology.

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Speaker 4: We think that the dominant companies have been justified again

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Speaker 4: in their dominance because of incredibly strong fundamentals.

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Speaker 3: But we think that you've.

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Speaker 4: Got better relative valuation opportunities outside geographically the US. And indeed,

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Speaker 4: last year, rather quietly, the euros dot fifty was slightly

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Speaker 4: stronger than the SMP. Many people don't acknowledge that year.

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Speaker 4: Today Europe has outperformed not just the SMP, but the Nasdaq.

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Speaker 4: So is Japan. So it isn't that we don't like

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Speaker 4: the US. It's gone up, it's done well, but there

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Speaker 4: are geographical opportunities to diversify, and I think that means

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Speaker 4: also broadening out from technology. We think technology is still

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Speaker 4: going to be crucially important and do well, but as

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Speaker 4: interest rates come down, and we get this soft landing.

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Speaker 4: The opportunity for broadening out into some more cyclical parts

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Speaker 4: of the market is improving, but also into non tech companies.

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Speaker 3: We put together a.

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Speaker 4: List of what we call ETC's X tech compounders. These

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Speaker 4: are global companies outside of the tech sector which have

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Speaker 4: strong characters, ristics of reinvestment at a high rate, compounding

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Speaker 4: high returns, and they tend to be somewhat cheaper, and

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Speaker 4: I think also offer good diversification opportunities.

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Speaker 1: Overnight, Peter, the City Group team, the equity team over

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Speaker 1: there actually upgraded EU stocks with about six percent more

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Speaker 1: upside year to day in their view, and it's one

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Speaker 1: of the highest in the street. This is the reason

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Speaker 1: why more certainty on rate cuts. We've been talking a

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Speaker 1: lot about that global growth you alluded to that and

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Speaker 1: dollar weakness. How much is dollar weakness necessary for this

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Speaker 1: call to work?

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Speaker 4: Actually, I'm less convinced on the dollar weakness part of

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Speaker 4: that story, although I agree with the other comments that

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Speaker 4: you made. The European economy is growing at a much

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Speaker 4: weaker pace than the US. You know, we're looking at

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Speaker 4: at US growth this year around two point eight percent

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Speaker 4: and in Europe about point seven. But we shouldn't forget

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Speaker 4: that the European companies that dominate the indices are very

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Speaker 4: global and therefore they benefit from a recovery in global

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Speaker 4: growth and in the global manufacturing cycle which is beginning

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Speaker 4: beginning to happen.

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Speaker 3: And I think actually that.

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Speaker 4: What we find for European stocks is that growth trumps

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Speaker 4: the currency. If growth is accelerating, European companies tend to

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Speaker 4: do well even if the currency is actually stronger. Now

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Speaker 4: it may well be weaker and that will add to

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Speaker 4: its relative competitiveness. But we don't think the currency is

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Speaker 4: actually the crucial part of this.

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Speaker 3: It's much more.

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Speaker 4: About relative fundamentals. Our earning is improving, and there's growth improving,

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Speaker 4: our interest rates coming down, all of those things suggest

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Speaker 4: they are. And Europe is only trading at around thirteen

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Speaker 4: thirteen and a half times PE compared to something like

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Speaker 4: twenty one in the US.

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Speaker 3: The UK only.

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Speaker 4: Trades around ten and a half time, is about half

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Speaker 4: the valuation of the US, and so there is evaluation

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Speaker 4: opportunity as well, which isn't really dependent I think so

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Speaker 4: much on currency, Peter.

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Speaker 1: When you look at India and China and you say

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Speaker 1: India has good growth, China can be value opportunity.

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Speaker 3: A lot of people move to India because.

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Speaker 1: They want to get away from China.

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Speaker 4: Why do you see something interesting in both markets? Well,

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Speaker 4: I think that India is a bit of a different story.

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Speaker 4: It's got high growth rates, both in terms of the

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Speaker 4: corporate sector and in terms of the economy. It's a

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Speaker 4: relatively expensive market, but it's one that has good exposure

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Speaker 4: to long term growth, and it is benefiting a little

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Speaker 4: bit from diversification supply chains and indeed diversification of investor

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Speaker 4: focus away from China towards India. China is a bit

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Speaker 4: of a different story. It is a valuation value play.

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Speaker 4: I mean the market trades at around seven times earnings,

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Speaker 4: much much cheaper.

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Speaker 3: Of course, it has a.

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Speaker 4: Lot more structural headwinds and a higher risk premium giving

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Speaker 4: given current developments, and it's much less I think of

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Speaker 4: a consensus than India. But for evaluation and led recovery,

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Speaker 4: if we get any policy stimulus, we think that there's

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Speaker 4: reasonable upside, at least tactically in that market as well.

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Speaker 2: I've got to finish on Japan. P it's just been

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Speaker 2: amazing nik two twenty five year today up by something

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Speaker 2: like twenty two percent. I think we had a move

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Speaker 2: over the last year of something close to fifty percent Pe.

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Speaker 2: When I buy the S and P five hundred market,

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Speaker 2: cat waited, I know what I'm buying. I'm buying megacat

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Speaker 2: tech in a big way. When I buy japan Pete,

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Speaker 2: what am I buying?

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Speaker 1: Well?

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Speaker 3: I think there's two things to say about this.

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Speaker 4: First of all, actually, just like the US, both Europe

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Speaker 4: and Japan have seen an increased concentration by stock. So

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Speaker 4: the biggest thirty companies in Japan, which are very global.

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Speaker 3: Are actually the biggest share.

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Speaker 4: Of the thousand biggest that we've seen going back over

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Speaker 4: several decades. So you are getting dominant, large cap globally

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Speaker 4: exposed companies doing very well. I think that, you know,

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Speaker 4: the Japanese market is much cheaper than the US. Of

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Speaker 4: course it's gone up a lot, but we shouldn't forget

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Speaker 4: it's only just broken through level that peaked at last

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Speaker 4: in nineteen ninety. And the fundamentals are finally very different

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Speaker 4: because you're getting expanding nominal GDP with finally coming out

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Speaker 4: of the deflationary stagnation that's dominated that economy over the

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Speaker 4: last twenty five thirty years.

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Speaker 3: But also quite a lot of.

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Speaker 4: Restructuring stories because of bottom up focus on improving return

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Speaker 4: on investment from a low level, so with rising margins

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Speaker 4: return on equity going up, that justifies a bit more

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Speaker 4: of a high evaluation. But the dominant companies there really

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Speaker 4: are global companies in areas around technology, high high value

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Speaker 4: added manufacturing that benefit from a bit of a pickup

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Speaker 4: and global manufacturing cycle as well, and we think they're

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Speaker 4: pretty well positioned.

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Speaker 2: John, Always enjoy your thoughts, thanks for being with us.

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Speaker 2: Peter Ropenhammer of Goldman Sanks on the latest