David Herro has been one of the top fund managers in the world for over a decade, and he says emerging markets are looking overvalued even after recent declines.
Top fund manager David Herro says that, while stocks jumped far more than most expected they would in 2013, they still should have room to run going forward.
“Despite the strong past performance of global equities, I believe there is still value in global equity markets,” Herro writes in his fourth-quarter letter to Oakmark shareholders. “Certainly, stocks are not selling at the incredible bargains they were in early 2009 or even early 2012, but with global economic growth appearing to be poised to accelerate, and with stock valuations that are still attractive, I believe there are reasons to be confident that global equities will continue to be an attractive asset class.”
Herro, whose funds profited greatly from overweight positions in Japanese firms last year, says the big gains seen for Japanese stocks has led to him paring back on those positions. “Since the low of the Topix in 2012, the market climbed around 80%!” he says. “As a result of the extremely strong uplift in prices, our holdings became less undervalued and caused us to trim some of our positions. Given that prices rose faster than corporate value creation, by the end of 2013, we were actually well underweight in the Japanese equity market.”
Herro talks more about the corporate changes going on in Japan, and what he thinks is needed for the country to continue its progress. “I believe that in order for the economic recovery to endure, the Japanese government needs to implement real structural reform,” he says. “This means that Japan’s government must complete at least three steps: take away protections from specific industries, like agriculture; remove impediments to productivity and workforce growth; and take away the barriers to mergers and acquisitions within corporate Japan.”
Top fund manager David Herro is continuing to find value in developed markets like America, and little opportunity in developing areas. Herro tells Bloomberg Surveillance that overall global stocks look good, especially given that we’re at a point in the economic cycle when earnings growth should be accelerating. “I think there is good value in American stocks, and in global blue chips in general,” he says. He adds that he sees good valuations for European blue chips, but that quality names in emerging markets are too expensive right now.
Are the latest troubles in Europe a reason to ditch European stocks? Top fund manager David Herro says no. In an interview with CNBC (via Yahoo Finance), Herro says that many investors who are ditching European stocks are making the mistake of not realizing that many European firms get a good deal of their business outside of Europe, like in emerging markets where growth is strong. He says he’s high on three main areas of the European market right now: financials, staples, and luxury goods. Herro also days he thinks the European auto market is bottoming.
Top fund manager David Herro has been buying up stocks in an extremely unloved area of the market: European banks. “If you look at our portfolio, we’re most overweight Europe and within that, European financials,” Herro tells CNBC. “The European recovery has legs and this is the best way to play it.” Herro says Europe still needs to repair its microeconomy. “But if you look at the various components of Europe,” he says, “we’re starting to see improvement,” particularly in Germany and the U.K. CNBC says Herro has recently picked up shares of Credit Suisse, Intesa Sanpaolo, BNP Paribas, Lloyds and Allianz. Herro also talks about why he’s having trouble finding value in emerging market stocks right now.
While investors have been hyperfocused on macroeconomic factors in recent years, Oakmark’s David Herro says microeconomic reforms are crucial to the global economy and markets.
In his second-quarter letter, Herro cites things like labor market reform and changes to social security systems as keys for stimulating growth. “Despite today’s current challenges, I am extremely optimistic that the emerging world will propel medium- and long-term global growth,” he says. “However, true structural reform, especially in the slow-growth, developed markets of Europe and Japan, would greatly supplement the more erratic growth patterns of emerging markets. Ultimately, we believe such policies would alleviate the ever pervasive macro fears and lead to an environment that would be extremely conducive to global equity markets.”
Herro says his firm is continuing to focus on fundamentals rather than macro factors. “We have consistently tried to use these periods of fear and uncertainty to take advantage of what we find are the low equity market valuations globally,” Herro writes. “Recall that the core of our investment philosophy is the notion that value is a function of the present value of all cash flow streams, not news headlines, which often have little or no impact on the long-term viability of cash flow streams.”
Top fund manager David Herro, who benefited from emerging market stocks in the 2000s, is now finding little opportunity among them. “It all has to do with price,” Herro tells Bloomberg. He says his fund went big into emerging markets in the late 1990s, but has pared back more and more as prices have gone up. He says emerging equities aren’t “catastrophically overpriced”, but that there are better opportunities now. Herro likes developed-world companies that capitalize on emerging market growth, like Daimler. He says he is most concerned with price and free cash flow when picking stocks, and adds that investors often get too wrapped up in what country a company is based.
Oakmark’s David Herro has been one of the most successful fund managers in the world over the past two decades by keying on unloved stocks, and he is continuing to focus his efforts on fear-filled areas of the market.
“If there’s no fear, you’re not going to get a bargain, because then the company’s good news is in the price,” Herro tells Kiplinger’s. “We’re able to take advantage of macroeconomic fears to buy stocks at good prices.”
Currently, Herro is high on stocks in Japan, where the economy has gone through two decades of deflation. He thinks it’s finally recovering, and says the recovery is only in its “third of fourth inning”. While Japanese stocks have surged in recent months, he says most still trade below book value. Herro also likes some stocks in much-maligned Europe — including some financials, which may be the most-maligned of all.
One area Herro isn’t keen on: emerging markets. He says there are good companies in some EMs, but they’re just too pricey.
Top fund manager David Herro is keen on Japanese stocks and technology shares as 2013 approaches.
“The year has the potential of being a very good year for stocks,” Herro tells Bloomberg. “One really has to look at Japan. It’s been the global equity market that has underperformed.”
Herro also says the underperformance of tech stocks has made for some nice bargains. “One area from an industry perspective is technology,” he says. “Technology shares have really lagged. In 1999, people were happy to pay 30, 40, 50 times earnings for some of these stocks. Now, many trade at 8, 9, 10, 11, 12 times earnings. They are still good businesses.”
Bloomberg also interviewed seven other top money managers about where they are looking in 2013, including Howard Ward of Gamco and Michael Shaoul of Marketfield Asset Management. To see a slideshow of their picks, click here.
Oakmark’s David Herro says he’s finding opportunities in beaten-down shares in Japan and Europe, but is wary of Chinese stocks. Herro tells Barron’s that Japanese stocks are extremely cheap, and Japanese blue chips are starting to do a better job of using their cash and increasing margins. In Europe, he says he’s looked for good, strong franchises with safe balance sheets and capital positions that will allow them to weather the continent’s economic storm. As for China, he says good, quality companies’ shares look expensive, while shares that look inexpensive are essentially wards of the state.