The Best Investments--Anywhere

This analyst blog is part of our coverage of the 2017 Morningstar Investment Conference.

If you could go anywhere in the world to find attractive investment opportunities, where would you focus?

That's the question Kevin McDevitt, senior analyst in Morningstar's manager research group, posed to panelists Charles Pohl of Dodge & Cox, Noriko Chen of Capital Group, and Amit Wadhwaney of Moerus Capital Management.

Specifically, McDevitt asked, with valuations at elevated levels around the globe, where are they finding opportunity?

Pohl said at Dodge & Cox they consider themselves long-term value investors, so they start with markets that look cheap on a relative, long-term basis.

"Emerging markets have lots of attractive stuff," Pohl said. "Pharma is under pressure, in developed and emerging markets. Valuations [in pharmaceuticals] are low relative to other sectors and relative to history."

He also added that investors could gain emerging-markets exposure by investing in one of the many developed-market pharmaceutical companies that have some exposure to emerging markets.

Pohl said financial stocks have also become interesting post-global financial crisis. There was a huge shock, followed by a tremendous regulatory burden. Regulators demanded for higher cap ratios and liquidity, but President Donald Trump is now interested in repealing some of those regulations. Add to that the prolonged zero interest-rate environment, which has weighed on banks, but which we're starting to move away from.

"Financials started from low valuations," Pohl said. "You can see that the earnings progression will improve, but the stocks are still undervalued because the financial crisis is fresh in investors' minds."

Chen also sees opportunity in emerging markets. There is growth in emerging-markets consumer spending as well as increased trade between emerging-markets countries.

"While we do see attractive sectors, we focus on the companies. A lot of these political events give us the opportunity to buy the companies we like at slightly cheaper valuations. There are a lot of global events that have happened that have created volatility, and we are taking advantage of that to find companies we like cheap."

Wadhwaney, meanwhile, says he and his team we look for severely undervalued companies.

"The idea is to buy something where things look terrible. We look in the left-hand tail of severely undervalued companies. What market-related factors might generate the opportunity?"

Two broad areas that said he found interesting are Turkey, where there is political risk, and Colombia, where consumer companies are cheap. He added that Italian banks have a "particularly interesting collection of warts," as some of the country's banks have become embroiled in a debt crisis.

"All emerging markets are not created equal, so we don’t like them all equally," Wadhwaney said. "But the U.S. feels sort of limited right now."

Pohl said there are some "interesting situations" with European banks amid a fiscal overhang; he said the European financial sector is one that benefits from a lot of fundamental research.

"They are quite undervalued. There has been an increase in liquidity, with little loan growth," Pohl said.

When asked if China's fiscal overhang has created issues for Chinese financials, Chen said there are some issues with midtier banks and asset managers, but for a variety of reasons, it's difficult to invest in them even though they look cheap.

"There is a heavy-handed regulation system [in China]; a lot of disincentives to doing business there," she said. "It's a controlled, competitive economy. Access to capital isn't difficult, the real issue is how to make money. We take a bottom-up, company-specific approach."

When discussing balance sheets, Wadhwaney pointed out that debt is but one liability. He said he tries to find the net asset value of a company and considers factors such as litigation risk and capital expenditure deferrals, which will ultimately end up as a liability.

"If company's a balance sheet is too opaque we just move on," Wadhwaney said.

Finally, in terms of emerging-markets companies paying dividends, Chen said dividend growth in emerging markets has outpaced that in the United States because it's coming off of a lower base. In addition, some state-owned companies in countries such as Brazil and China are mandated to pay out income.

"IT companies starting to pay a dividend because they have cash flow and they're doing less M&A," she said.