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Why Continue to Invest in International Equity Markets?

by | Apr 23, 2024

It has been a challenging time to be an international equity investor given the prolonged period of outperformance by U.S. equities. At the same time, we believe it is critical not to lose sight of the benefits of continuing to invest in international markets including:

  • A wider opportunity set – despite the size of the U.S. market, per Bloomberg, there are over 3 times more publicly traded international companies than U.S. companies;
  • Diversification – Inherent in exposure to other economies and cycles, international markets have experienced different market performance patterns compared with U.S. markets which helps lessen the impact of volatility across the boards; and
  • Value – International stocks (in aggregate) tend to be cheaper, pay higher dividends and hence are more attractively valued versus U.S. stocks.

That said, as bottom-up investors, we believe the most compelling reason is the ability to access a wide range of high-quality companies that are not available in the U.S. market. The snapshot below highlights a few of these names. Although held in most of our portfolios, they are not reflective of all portfolios and are for illustrative purposes only:

Earlier this year, Lewis Hamilton surprised the motorsports world when he announced that he was leaving Mercedes at the end of season to join Ferrari’s racing team. Despite changing teams and ultimately race cars, we are confident Hamilton will continue to rely on Brembo’s high-performance brake systems. Brembo’s entry into the Formula 1 space began in the 1970s and today it is the main supplier to the top racing series in the world. Beyond racing, the company commands a virtual monopoly position in the super-premium/ultra-luxury segment (Ferrari, Porsche, Maserati, Lamborghini, etc.)  and a leading share (25-30%) in the premium to mid-premium segments (Mercedes, Audi, BMW, etc.) of the automotive industry. Its years of experience in the high-end racing segment helped them forge its technological leadership position.  Beyond technology, the company’s competitive advantage includes its high-quality brand, vertically integrated operations and a global footprint. These advantages have led them to be one of the most profitable suppliers in the automotive industry over the past 10 years. Management continues to invest in R&D to develop innovative products, including next year’s roll-out of their new intelligent braking system “Sensify”, while maintaining a strong balance sheet in the process. So, while there are several quality automotive suppliers in the U.S. market today, Brembo is unique given how it straddles the line between being an automotive parts supplier and a luxury brand.

Through our extensive research on the global airline industry over the years, we believe the two best airlines are found outside of the U.S.. Panama-based Copa Holdings and Ireland-based Ryanair enjoy leadership positions in their respective markets. Across many of the routes, they command dominant market shares enabling them to efficiently operate their networks and maximize passenger yields. Over the past decade, they have delivered outsized profitability relative to peers, in an industry littered with bankruptcies and government bailouts. As the demand for air travel continues to expand globally, both airlines will be clear benefactors of this secular trend. Lastly, both companies are led by longstanding and disciplined CEOs, who sought to ensure they maintained the strongest balance sheet amongst peers, allowing them to emerge from the pandemic in even stronger competitive positions.

With the growing proliferation of computer chips across industries, Taiwan Semiconductor Manufacturing Company (“TSMC”) sits at the heart of this secular trend as the world’s largest semiconductor foundry. Today the company manufactures over 50% of the world’s logic chips and over 90% of the leading-edge chips. The company stands out for its scale and manufacturing expertise, business model independence, ecosystem of value chain partners, customer service and domain expertise. The company has historically delivered high and remarkably resilient profitability despite the industry’s cyclicality. Management are the pioneers of the foundry model, which peers are once again seeking to emulate. Lastly, the company’s cash-rich balance sheet is critical to maintaining its technological leadership position in what is arguably the world’s most capital-intensive industry.

A prolonged era of low interest rates and rising home prices has supported the financial records of many homebuilders across the U.S. over the last decade. Yet the cyclical nature of this market is permanently etched into our minds following lessons learned from the global financial crisis. We believe a more resilient approach to homebuilding can be found in U.K.-based Berkeley Group. The business stands out for a unique London-focused strategy that stresses a limited number of meaningful and complex brownfield developments in a chronically undersupplied housing market. Berkeley’s long history with this type of project in London, its ability to maximize the number of units per site, and localized operating structure uniquely positions the company to manage these types of developments and deliver industry leading profitability. To navigate the unpredictable cyclical swings of this industry, Berkeley’s management team makes heavy use of forward sales, has amassed a sizeable land bank, successfully draws upon London’s appeal to foreign buyers and most importantly, maintains a net cash balance sheet.

As artificial intelligence captivates markets, during the quarter our attention was drawn to a more obscure segment of the market – meat casings!!– as we initiated a position in Viscofan. The Spanish-based company is the world’s largest producer of artificial casing for the processed meat industry with over a 40% market share. Viscofan distinguishes itself through the breadth of its custom casings offering, their production process know-how developed over the decades and industry leading profitability. The long tenured management team successfully expanded its market share over the years with their customer service-oriented mindset, while maintaining a strong balance sheet along the way.  Looking ahead, Viscofan will benefit from increased protein consumption in developing markets, an ongoing shift towards synthetic casings and new product innovations centered around improving customer production processes and rising demand for better performing casings.

These companies are only a sampling of the franchises available for investment within international markets. At Sprucegrove, while we are amply aware of market performance, we remain steadfast in our long-term approach.  It is an approach focused on investing in high quality companies at attractive valuations, possessing enduring economic moats, capable management teams, above average profitability and strong balance sheets which should produce superior returns over the long term.

Stock Proj. ROE Fin. Lev Norm. P/E Div. Yield
Berkeley Group 16.0  2.1 9.2 1.9
Brembo 18.0 2.0 10.4 2.5
Copa Holdings 15.0 2.7 13.7 3.1
Ryanair (ADR) 22.0 2.0 17.3 0.6
TSMC 28.0 1.6 20.9 1.7
Viscofan 16.0 1.5 17.7 3.3

*Holdings are subject to change. All holdings are available upon request.

[1] Source: Sprucegrove, MSCI, FactSet

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