Fundamental Investors Should Look for Opportunities in International Equity in 2020


Fundamental Investors Should Look for Opportunities in International Equity in 2020


By Elisa Mazen, Head of Global Growth, Portfolio Manager at ClearBridge Investments


Looking at 2019 equity performance globally, large capitalization companies did very well.  Small capitalization companies were less able to deflect and pivot on some big issues related to trade war fears. Outflows in many international markets – except Japan and Brazil – largely on political concerns, disproportionately impacted small caps.

What will help small caps? The same things that could help most U.S. and foreign companies: better local economies, improved liquidity, a weaker U.S. dollar (USD) and more accommodative monetary policy.

“Trade wars” are not just about trade, but about trying to maintain dominance. Will the Trump Administration wrap up these trade battles in a nice bow and hand it to the markets as a gift? No, that is not in their interest. They will continue to use the leverage they have until they can demonstrate they have won, undoubtedly through the 2020 presidential election.

The threat of 100% tariffs on France in retaliation for digital taxes on U.S. tech companies are examples of President Trump seeking to protect U.S. interests against all parties – whether perceived an ally, or not.

Overall earnings growth has not been particularly robust. It was quite good in Japan last year, but it has not been particularly good in Europe. We are hoping for more earnings growth this year from a weaker USD, monetary and fiscal stimulus, and continued calm on political fronts (ex-Brexit).

We are constructive about M&A globally, especially coming from European companies, which are in very good shape on a balance sheet basis. Health care has seen several deals and could see more; financials are trading at attractive valuations for accretive M&A; and luxury goods and related consumer companies also could see more action.

Specifically, European financials and banks could be interesting in 2020. Loan growth, higher rates and better yields could change their earnings trajectory. We are overweight technology, for obvious reasons. We like the stock exchanges, which have done very well as they have morphed into information technology companies more than IPO or trading machines.

Consensus earnings growth for European stocks is between 8-10%. What happens with the dollar is materially important. If it weakens, that will be much better. Good wage growth is happening, 2.5%. Unemployment went from a peak of 13% to 7.5%. That is very good for the consumer-led, developed economies in Europe. And the political issues throughout Europe are mostly resolved.

The potential for fiscal stimulus in Europe is considerable. Surpluses are good. Germany could stimulate and grow through green initiatives. Although pro-growth economic strategies have not been talked about in Europe for a long time, there is a good chance that can happen. It is time to pass the baton to the fiscal side, to enact pro-growth policies.

Emerging markets are a mixed bag. The more export-sensitive manufacturing countries like Korea were impacted by trade concerns, but there was very good performance in larger markets like China, which were impacted early in 2019 and did quite well throughout the rest of the year.

Targeting emerging growth companies can provide opportunities to buy into long-term growth compounders at attractive levels, participating in IPOs in areas such as financial technology and music streaming. Many investors are anticipating recovery, but emerging markets underperformed relative to developed markets. Perhaps that is a good setup. While it is always difficult to generalize, the stock specifics matter, and there are a lot of interesting small cap emerging market ideas.

Some very interesting small cap emerging market stocks have done well. We invested in an emerging growth company oriented to the development of the Chinese health care system, which is very new and an interesting long-term emerging growth play.

We do not think we can ever predict a recession. We cannot say which market will be better, or which currency. We believe, however, that there are plenty of opportunities for good stock pickers in 2020. We will stick to that.

Elisa Mazen is Head of Global Growth and Portfolio Manager at ClearBridge Investments, a subsidiary of Legg Mason. Her opinions are not meant to be viewed as investment advice or a solicitation for investment.

Elisa Mazen, Head of Global Growth, Portfolio Manager, ClearBridge Investments


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