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Speaker 1: He's in Chicago, yes, but with his great affiliation north to Green Bay. David Harrow joins this portfolio manager beliegued in the international front. David, let's do the baseball right away. Here. Brewers traded away their star to the Baltimore Orioles, you know, contracts and all that stuff. Do the Brewers have a chance to redo it again?
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Speaker 2: Of course they do. Tom Now we also traded away our manager of the Cubbies.
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Speaker 3: What was that about.
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Speaker 2: I don't know. I didn't know what It was a good opportunity for mister Council. But the Brewers are on the ascent. The Packers are on the ascent. Badger basketball all is looking good in Wisconsin, right.
00:00:38
Speaker 1: We won't mention the boiler up. They took it to the Wisconsin Badgers here the other day. Let's talk about the challenges of international investing. I'm not going to mince words, David, and I want to make clear, folks. David Harrow and I go back ages and ages. Boy, it's been a challenge for you. When does your bet on European banking workout? What's the catalyst to create vailue in European banking?
00:01:02
Speaker 2: Well, actually, the stocks have started performing over the last couple of years, and we've been overweight literally since the European sovereign debt crisis of what was at twenty eleven, twenty twelve, twenty thirteen recalled. Back then, there was a belief that the pigs were all going to default. Portugal, Italy, Spain, Greece, We're all going to maybe even France was going to default. None of this really happened. But during the better part of that decade, the banks did have to build capital like they did all over the world, and that kind of prevented some growth and more money going to shareholders. They still performed okay in terms of business operations. Now here we are ten twelve years later, we see banks that are fully capitalized, meaning that whatever they generate in profits they could either use to grow their businesses or they could use to give money back to the shareholders. And that's exactly what's been happening. And at the same time, what we see is now with higher interest rates. Don't forget, Europe had negative nominal not real Europe had negative nominal interest rates, and today we're well into the three. So I think all those things that were headwinds for the European banking sector are now tailwinds, which means that when we see these six to seven times price to earnings ratio, sixty to seventy book price to book nine ten percent dividend yields, this is an environment where earnings are growing and where capital is being generated and shareholder returns are increasing. So I do think still now we're about equal weight. We're not as overweight as we were as we trimmed a little into the strength, but I still think this is one of the great pockets of value if you believe that a business is worth the cash flow streams which they generate.
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Speaker 3: Which, David,
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give us your sense of the underlying European economic outlook here, because a lot of folks they recognize the value in European equities and debt and just asset values, but just not sure about the growth over the next several years. How do you think about that?
00:03:11
Speaker 2: Well, first of all, you have to look at Europe on whole, where you have various countries grown at different rates. Southern Europe, believe it or not, is doing pretty good, Spain, Portugal, even Italy growing one two three percent. Then, of course the biggest economy in Europe. Germany is on its back. Yep, it's on its back as it was a couple decades ago, and it's on its back for a number of reasons, starting probably with their energy policy. But anyway, you have the situation where people are judging European businesses by where they're based, not by where they're making money, not where they're doing business, not where they're cash flow streams come from. So people don't want to invest, say in a German company, even though a business like SAP semens Alians of course Mercedes BMW. These are global businesses that do business all over the world, that are growing, that have good return structures, that are selling at very very depressed valuations. I believe the DAX is that just ten or eleven times earnings, and when you compare this to the German tenure where it is it about two and a quarter. So if you look at that earnings yield of the daks about ten percent, and you look at the German tenure, that yield equity yield is about seven and three quarters percent. If you do that for the United States, you get about twenty or thirty basis points, and it shows you the valuation differential that exists in places like Germany versus the US, and I would argue it's unwarranted given that many of these companies in particular, don't just do business in Germany or in Europe. They're global businesses that new commerce all over the world.
00:05:03
Speaker 3: So David, let's switch gears a little bit and talk a little bit about Japan. I mean, when I started my career on Wall Street in the mid eighties, it was you you had to do a tour of duty in Tokyo. That was how important that market was. Boy, that's not been the case for the last twenty five years or so, but I'm hard starting to hear more and more people, including Warren Buffett, talk about opportunities in Japan. How do you guys look at that market?
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Speaker 2: Well, like you, I started my career in the mid eighties, nineteen eighty six, I started.
00:05:31
Speaker 1: Meet too career the gym six fun was was fun?
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Speaker 2: Well in your no. I started my career in eighty six. International investing, My first fund I invested in was started in nineteen eighty seven des Moines, Iowa at what was then called The Banker's Life. I believe Japan was somewhere around seventy seventy five percent of the international of the IFA index, and it traded at about sixty or seventy times earnings five times book value, and it had an average return on equity this is important, of around seven or eight percent. The market then peaked in nineteen eighty nine. Remember there was a huge bubble at property bubble, equity market bubble in Japan at peaked the end of December in nineteen eighty nine, the Nikai was almost forty thousand, just under forty thousand at seventy times earnings, five times book seven and a half percent roe. Fast forward to today, we're down to about fourteen times earnings. Okay, much better, no longer a bubble. We're at about two and a quarter times book. But the return on equity of an average Japanese company is just eight or eight and a half percent. Now there's all kinds of talk about Japanese companies rediscovering the need to increase profitability, returns, shareholder returns, et cetera. It has gotten better, but we're talking about hourly moving from seven to eight or eight and a half nine percent, still sub performing the rest of the world, making it difficult for a value investor to find value.
00:07:10
Speaker 1: David, you've got an immense advantage that you're not on the left coast to the right coast. You're smack dab the legit flyover zone as well. What does Wall Street get wrong within the three zip codes in New York City? What's the number thing we get wrong about the American productivity experiment?
00:07:28
Speaker 2: Well, first of all, I mean quite clearly, there is a uniqueness about America, and this is why everyone this is why we have a border crisis, folks, because people are fleeing command economic structures where they're economically oppressed, and they're going to economic freedom. We're not as free as we used to be, but we're still one of the most free from an economic perspective. It still is a land of opportunity. We still have huge upward mobility and so people want to come here and we don't even have the safety nets that say Europe has or Canada hands. We have opportunities. We have an opportunity society, and we do forget about this. It's not perfect by any means, but it's far better than any other place in the world.
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Speaker 1: David got to leave it there, David Harrow, thank you so much with a real look in there. As Paul mentioned, Germany a real focus of his portfolio. Mister Harrow's Deputy Chairman, Chief Investment Officer International Equities, Harris Associates