Why This Top Manager Thinks Markets Are Less Risky Now

Katie Reichart: I'm Katie Reichart, director of equity strategies with Morningstar. As we gear up for the 2022 Morningstar Investment Conference in Chicago, I'm pleased to be joined by Sarah Ketterer, CEO and co-founder of Causeway Capital Management. Sarah is a panelist who will be discussing international-equity opportunities. She also runs Causeway International Value and Causeway Global Value, which have Morningstar Analyst Ratings of Gold.

Sarah, thanks for joining me.

Sarah Ketterer: Thanks, Katie.

Reichart: It's obviously been a really rough start to 2022 between the war in Ukraine, supply chain constraints, inflation. How are you assessing all the risks in the marketplace at this point?

Ketterer: Katie, the team and I think the risks in markets globally are now lower than they've been since March 2020. And that's because we're seeing this selloff, and in particular, the long-duration stocks, those where there are no underlying earnings, or they're very minimal, and they don't tend to return capital to shareholders. Those very high-multiple stocks are the ones seeing the greatest of selling, and in turn, the market is favoring energy for very obvious reasons, catalyzed by the Russian invasion of Ukraine, and it's also favoring metals and mining and then, interestingly, lots of defensive areas. So, markets have obviously sold off. But that means that valuations are lower, and therefore risk is lower for money that's entering today.

Reichart: In terms of specific opportunities, what are you seeing right now and how does that compare?

Ketterer: Well, a multitude – This is when value managers run down the hallway screaming with joy. We know we can do well coming out of recession. We haven't yet gone into recession in many regions. But with central banks in all regions, barring China, attempting to tighten monetary policy and raise rates and shrink balance sheets, some economies may very much slow and then reverse course. So, the stocks that tend to do best are the early cyclicals, and that's where we're positioned, in areas such as banks, especially European as they've been sold off so heavily with the Russian invasion. Any European banks with Russian exposures such as UniCredit or ING Groep, they trade at levels, not just the lows of the pandemic, they trade at levels where we last saw them in the global financial crisis, but they are many times stronger in terms of their own balance sheets and their management skills, not to mention the returning capital to shareholders. So, the opportunities are phenomenal. These are stocks that we believe will have very significant outperformance because they tend to sell off going into recession and then they respond. They start to rise before we even see the economic data recover.

Reichart: And you've been through many cycles before. Can you talk about how your previous experience has helped give you confidence in your approach?

Ketterer: Well, it does help to have been through many cycles, and they are all different. But it's very clear, we went through a prolonged period of monetary expansion, accelerated with fiscal expansion that came as well during the COVID period. And all that added a lot of speculation into stock markets, way too much money chasing too few opportunities. And now that we're seeing the reverse, it's not that dissimilar to the early 90s after the TMT [technology, media, and telecom] bubble burst. And we're positioned accordingly with a combination of some economically defensives, a lot of early cyclicals, not just in banks but in areas such as travel recovery, where once the China lockdowns end, which they must, these are stocks that should do extremely well, such as LV Sands for example. So, it's a unique cycle, but it's very similar to prior in that we want to make sure we're going to be in the stocks that will respond to the prospect of reopening and economic recovery long before it's obvious to the rest of the market.

Reichart: And thinking back over the past decade, international equities have had a bit of a rough go relative to their U.S. counterparts. How would you put that in context for investors who may be frustrated?

Ketterer: Well, I totally understand the frustration. But if you think about the international developed markets, it's much more cyclical than that of the U.S. market, much less in the way of exciting technology and exciting anything, for that matter. But there are some great, great companies and they trade at such low valuations that we're convinced that that valuation gap more than reflects what is a more cyclical region. And what better time to be in cyclicality than now as we are facing a downturn, but the next phase will clearly be a recovery. It's very unlikely that central banks are anxious to kill economies or put them in a position where they're slow to recover. Therefore, this may be a very brief downturn. And we have to get positioned now--you literally have to buy these stocks before the recovery is even possible in the minds of investors. And that's same of Japan, and as for emerging markets, that's where so much growth resides and will continue to do so, in particular, China, once they get past their lockdown period.

Reichart: Great. Well, thank you, Sarah, for joining us. For Morningstar, I'm Katie Reichart.

Ketterer: Thank you.