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Speaker 1: He's in Chicago, yes, but with his great affiliation north

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Speaker 1: to Green Bay. David Harrow joins this portfolio manager beliegued

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Speaker 1: in the international front. David, let's do the baseball right away. Here.

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Speaker 1: Brewers traded away their star to the Baltimore Orioles, you know,

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Speaker 1: contracts and all that stuff. Do the Brewers have a

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Speaker 1: chance to redo it again?

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Speaker 2: Of course they do. Tom Now we also traded away

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Speaker 2: our manager of the Cubbies.

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Speaker 3: What was that about.

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Speaker 2: I don't know. I didn't know what It was a

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Speaker 2: good opportunity for mister Council. But the Brewers are on

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Speaker 2: the ascent. The Packers are on the ascent. Badger basketball

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Speaker 2: all is looking good in Wisconsin, right.

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Speaker 1: We won't mention the boiler up. They took it to

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Speaker 1: the Wisconsin Badgers here the other day. Let's talk about

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Speaker 1: the challenges of international investing. I'm not going to mince words, David,

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Speaker 1: and I want to make clear, folks. David Harrow and

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Speaker 1: I go back ages and ages. Boy, it's been a

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Speaker 1: challenge for you. When does your bet on European banking workout?

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Speaker 1: What's the catalyst to create vailue in European banking?

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Speaker 2: Well, actually, the stocks have started performing over the last

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Speaker 2: couple of years, and we've been overweight literally since the

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Speaker 2: European sovereign debt crisis of what was at twenty eleven,

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Speaker 2: twenty twelve, twenty thirteen recalled. Back then, there was a

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Speaker 2: belief that the pigs were all going to default. Portugal, Italy, Spain, Greece,

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Speaker 2: We're all going to maybe even France was going to default.

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Speaker 2: None of this really happened. But during the better part

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Speaker 2: of that decade, the banks did have to build capital

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Speaker 2: like they did all over the world, and that kind

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Speaker 2: of prevented some growth and more money going to shareholders.

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Speaker 2: They still performed okay in terms of business operations. Now

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Speaker 2: here we are ten twelve years later, we see banks

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Speaker 2: that are fully capitalized, meaning that whatever they generate in

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Speaker 2: profits they could either use to grow their businesses or

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Speaker 2: they could use to give money back to the shareholders.

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Speaker 2: And that's exactly what's been happening. And at the same time,

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Speaker 2: what we see is now with higher interest rates. Don't forget,

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Speaker 2: Europe had negative nominal not real Europe had negative nominal

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Speaker 2: interest rates, and today we're well into the three. So

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Speaker 2: I think all those things that were headwinds for the

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Speaker 2: European banking sector are now tailwinds, which means that when

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Speaker 2: we see these six to seven times price to earnings ratio,

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Speaker 2: sixty to seventy book price to book nine ten percent

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Speaker 2: dividend yields, this is an environment where earnings are growing

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Speaker 2: and where capital is being generated and shareholder returns are increasing.

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Speaker 2: So I do think still now we're about equal weight.

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Speaker 2: We're not as overweight as we were as we trimmed

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Speaker 2: a little into the strength, but I still think this

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Speaker 2: is one of the great pockets of value if you

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Speaker 2: believe that a business is worth the cash flow streams

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Speaker 2: which they generate.

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Speaker 3: Which, David, give us your sense of the underlying European

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Speaker 3: economic outlook here, because a lot of folks they recognize

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Speaker 3: the value in European equities and debt and just asset values,

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Speaker 3: but just not sure about the growth over the next

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Speaker 3: several years. How do you think about that?

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Speaker 2: Well, first of all, you have to look at Europe

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Speaker 2: on whole, where you have various countries grown at different rates.

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Speaker 2: Southern Europe, believe it or not, is doing pretty good, Spain, Portugal,

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Speaker 2: even Italy growing one two three percent. Then, of course

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Speaker 2: the biggest economy in Europe. Germany is on its back. Yep,

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Speaker 2: it's on its back as it was a couple decades ago,

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Speaker 2: and it's on its back for a number of reasons,

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Speaker 2: starting probably with their energy policy. But anyway, you have

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Speaker 2: the situation where people are judging European businesses by where

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Speaker 2: they're based, not by where they're making money, not where

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Speaker 2: they're doing business, not where they're cash flow streams come from.

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Speaker 2: So people don't want to invest, say in a German company,

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Speaker 2: even though a business like SAP semens Alians of course

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Speaker 2: Mercedes BMW. These are global businesses that do business all

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Speaker 2: over the world, that are growing, that have good return structures,

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Speaker 2: that are selling at very very depressed valuations. I believe

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Speaker 2: the DAX is that just ten or eleven times earnings,

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Speaker 2: and when you compare this to the German tenure where

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Speaker 2: it is it about two and a quarter. So if

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Speaker 2: you look at that earnings yield of the daks about

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Speaker 2: ten percent, and you look at the German tenure, that

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Speaker 2: yield equity yield is about seven and three quarters percent.

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Speaker 2: If you do that for the United States, you get

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Speaker 2: about twenty or thirty basis points, and it shows you

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Speaker 2: the valuation differential that exists in places like Germany versus

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Speaker 2: the US, and I would argue it's unwarranted given that

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Speaker 2: many of these companies in particular, don't just do business

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Speaker 2: in Germany or in Europe. They're global businesses that new

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Speaker 2: commerce all over the world.

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Speaker 3: So David, let's switch gears a little bit and talk

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Speaker 3: a little bit about Japan. I mean, when I started

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Speaker 3: my career on Wall Street in the mid eighties, it

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Speaker 3: was you you had to do a tour of duty

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Speaker 3: in Tokyo. That was how important that market was. Boy,

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Speaker 3: that's not been the case for the last twenty five

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Speaker 3: years or so, but I'm hard starting to hear more

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Speaker 3: and more people, including Warren Buffett, talk about opportunities in Japan.

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Speaker 3: How do you guys look at that market?

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Speaker 2: Well, like you, I started my career in the mid eighties,

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Speaker 2: nineteen eighty six, I started.

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Speaker 1: Meet too career the gym six fun was was fun?

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Speaker 2: Well in your no. I started my career in eighty six.

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Speaker 2: International investing, My first fund I invested in was started

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Speaker 2: in nineteen eighty seven des Moines, Iowa at what was

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Speaker 2: then called The Banker's Life. I believe Japan was somewhere

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Speaker 2: around seventy seventy five percent of the international of the

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Speaker 2: IFA index, and it traded at about sixty or seventy

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Speaker 2: times earnings five times book value, and it had an

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Speaker 2: average return on equity this is important, of around seven

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Speaker 2: or eight percent. The market then peaked in nineteen eighty nine.

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Speaker 2: Remember there was a huge bubble at property bubble, equity

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Speaker 2: market bubble in Japan at peaked the end of December

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Speaker 2: in nineteen eighty nine, the Nikai was almost forty thousand,

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Speaker 2: just under forty thousand at seventy times earnings, five times

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Speaker 2: book seven and a half percent roe. Fast forward to today,

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Speaker 2: we're down to about fourteen times earnings. Okay, much better,

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Speaker 2: no longer a bubble. We're at about two and a

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Speaker 2: quarter times book. But the return on equity of an

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Speaker 2: average Japanese company is just eight or eight and a

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Speaker 2: half percent. Now there's all kinds of talk about Japanese

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Speaker 2: companies rediscovering the need to increase profitability, returns, shareholder returns,

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Speaker 2: et cetera. It has gotten better, but we're talking about

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Speaker 2: hourly moving from seven to eight or eight and a

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Speaker 2: half nine percent, still sub performing the rest of the world,

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Speaker 2: making it difficult for a value investor to find value.

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Speaker 1: David, you've got an immense advantage that you're not on

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Speaker 1: the left coast to the right coast. You're smack dab

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Speaker 1: the legit flyover zone as well. What does Wall Street

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Speaker 1: get wrong within the three zip codes in New York City?

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Speaker 1: What's the number thing we get wrong about the American

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Speaker 1: productivity experiment?

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Speaker 2: Well, first of all, I mean quite clearly, there is

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Speaker 2: a uniqueness about America, and this is why everyone this

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Speaker 2: is why we have a border crisis, folks, because people

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Speaker 2: are fleeing command economic structures where they're economically oppressed, and

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Speaker 2: they're going to economic freedom. We're not as free as

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Speaker 2: we used to be, but we're still one of the

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Speaker 2: most free from an economic perspective. It still is a

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Speaker 2: land of opportunity. We still have huge upward mobility and

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Speaker 2: so people want to come here and we don't even

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Speaker 2: have the safety nets that say Europe has or Canada hands.

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Speaker 2: We have opportunities. We have an opportunity society, and we

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Speaker 2: do forget about this. It's not perfect by any means,

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Speaker 2: but it's far better than any other place in the world.

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Speaker 1: David got to leave it there, David Harrow, thank you

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Speaker 1: so much with a real look in there. As Paul mentioned,

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Speaker 1: Germany a real focus of his portfolio. Mister Harrow's Deputy Chairman,

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Speaker 1: Chief Investment Officer International Equities, Harris Associates