(PUB) Investing 2015

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17 Morningstar FundInvestor April 2015
going to come down, and they are going to come
down more for the leveraged companies, for the
cyclical companies. They are going to come down
for the quality guys, but much less. So, today is a
time when we think, on a P/E basis, they should be
trading at a premium because their earnings are
less at risk, but they are actually trading at parity or
a slight discount.
Benz: International is maybe a slightly more opti-
mistic picture. Let’s start by talking about your outlook
on developed foreign stocks.
Inker: Non- U.S. stocks look better than U.S. stocks;
that’s about the strongest thing I can say for them.
They look to be the place to be. Unfortunately, even
there, they’ve done very well since the market
bottomed in 2009, and the P/Es are pretty high. If you
look at Europe today, it’s trading around 20 times
earnings. The good news relative to the U.S. is that
at least their earnings today aren’t near the peak.
Because the economy hasn’t been that strong, profit
margins look kind of normal. And so, we don’t think
that these markets are cheap, but we do think
that they are priced to deliver returns above inflation.
Whereas, in the U.S., I was talking about how the
leveraged companies and the cyclical companies
have really benefited from widening profit margins,
that has not been true at all in a place like Europe.
What we find is, in Europe, we’d much rather buy the
traditional value-type companies—the dopey compa-
nies that, in general, have some problems to them.
They are trading at pretty good discounts, wider than
normal. As a result, we think if you’re going to be in
Europe, we think you want to be in the value stocks.
Benz: How about value stocks in developing markets?
It sounds like you think they’re the most attractive
pocket of the entire market universe today.
Inker: It’s really interesting how investor attitudes
toward emerging markets have changed over the past
few years. Going into the financial crisis—and even a
couple of years out of the financial crisis—the as-
sumption was that emerging-markets economies grow
much faster than the developed world. This is the
place to be. If you’re going to invest in stocks, you are
a growth investor. And if you are going to be a growth
investor, invest where the growth is.
People were very excited about them. The valuations
rose accordingly. But the last three or four years,
people have been pretty disappointed with what’s
happened in emerging, and the valuations have
really come down. We are generally contrarians: Our
view is that whatever is going on will probably cease
and the future will look more normal. And if we
got a return to normalcy in emerging markets, it would
actually be a pretty good thing. In particular, for
some of the value stocks within emerging—which
have seen their profit margins come in in the past two
years—we think there’s the potential for P/Es to
expand and, in some cases, for profitability to improve.
So, it’s one area where we actually think achieving
low-double-digit nominal returns is possible. œ
Contact Christine Benz at