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Bram de Haas
Bram de Haas
Articles (333)  | Author's Website |

David Herro: Trade War Tension and European Politics Open Up Opportunities

A review of a Herro's comments on Bloomberg

David Herro (Trades, Portfolio) is the chief investment officer of international equities at Oakmark. He has manages the Oakmark International Fund (OAKIX) since 1992, the Oakmark International Small Cap Fund (OAKEX) since 1995 and the Oakmark Global Select Fund (OAKWX) since 2006. He has won Morningstar's International Stock Fund Manager of the Year in 2006 and International Stock Fund Manager of the Decade for 2000-09. Herro appeared on Bloomberg TV on Aug. 28. The full interview can be watched on Oakmark's website here. Herro talked about two key issues: trade tensions and European politics and related Oakmark investments.

Buy German automakers

The german automakers, particularly Daimler (DAI) and BMW (BMW) have experienced big downward price movements. Herro said he believes these prices moves are unwarranted. They have operations and production all over the world.

Tarriffs are admittedly a negative. Both BMW and Daimler export cars from the U.S. to China. What would be more impactful would be tarrifing imports from Europe to the U.S. Eventually you will see a balancing of production where sales are. On the positive side, China cut its tariffs from 25% to 15% for cars from Germany to China.

But if you look at the big picture and future cash flow streams, share price pressure is not warranted by fundamentals.

With some trade relief there is a little uplift. There is a lot more to go. The valuations today reflect a permanent diminuition of value that just isn't warranted. On some prices the yield is greater than the orice-earnings ratio. Both trade around a price-earnings ratio of 6. Daimler pays a 7% dividend yield. With so many words, Herro indicated he has been buying more.

European politics

The biggest macro events recently have been trade and European politics. European politics hit the financial sector in Europe, and Oakmark is observing extremely low valuations, especially in companies like CNH Industrial (NYSE:CNHI), which has very good numbers.

Assumptions of a no-deal Brexit really hit hard in U.K. share prices. If they don’t reach a deal, there will be something of a storm. But there will still be a future after that. Herro believes the market is unduly pessimistic about the prospects for U.K. business.

Prognosis for Italy

The political situation in Italy isn’t very stable either. Investors offloaded Italian bonds over the summer because the populist governing coalition's fiscal plans put the country's already huge debt pile under strain. Herro added that it has never been very stable. There have been 66 regimes since WWII. It's a place that still more or less functions with unstable governments.

However, the sell-off has had an extremely large effect on the Italian banking sector. Despite the low share price, the businesses do quite well. One bank owned by Oakmark is Intesa Sanpaolo (ISN), which is an Italian bank trading at 0.66x book value. Herro said he thinks the bank has been cleaning up its balance sheet.

Italy does have a giant sovereign debt load, but the public sector actually also owns a lot of valuable assets. It could go through a transition where it sells off public institutions. Italy does need to control spending. It needs some reforms. What it most needs is economic growth. The north is already growing. But the south isn’t.

Another name that sold off hard on Italy's and Turkey's woes is BNP Paribas (BNP). BNP Paribas is actually a French bank that has some Italian exposure and a little bit of Turkish exposure but actually isn't measurably impacted by Italy or Turkey. Its share price has been affected, and it trades at a similar price-book value to Intesa. Herro believes valuations are very modest as European financials are stronger and sounder compared to before the crisis.

Oakmark listed all his top holdings on its website:



Disclosure: Author has no positions in any stock mentioned.

About the author:

Bram de Haas
Bram de Haas is the managing editor of The Black Swan Portfolio.

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