Ray Mills, Portfolio Manager, T. Rowe Price
Thursday, September 27, 2007SUZANNE PRATT: The U.S. dollar fell to a record low against the euro for the sixth straight trading day. Many international stock funds have benefited from continued weakness in the dollar. Joining me now to talk about investing in foreign markets is Ray Mills, portfolio manager of the T. Rowe Price international growth and income fund. Ray, welcome to NIGHTLY BUSINESS REPORT.
RAY MILLS, PORTFOLIO MANAGER, T. ROWE PRICE: Good evening Suzanne.
PRATT: The S&P 500 is up 80 (ph) percent near the day (ph) as many international markets are outperforming U.S. stocks as well. They have for the last few years. Why is that?
MILLS: I think you have to look at where we started. In the U.S. corporate profitability has been strong for a number years. Corporations have done a lot of cost cutting. The economy has been fairly good, although now we're seeing signs of weakness. Where outside the U.S. things are getting better. Corporate profitability is increasing in Europe. In Japan it's gotten better over the past few years. Fundamentals in emerging markets are improving and have improved over the past five years. Markets like those inflection points. They like when things are changing and getting better.
PRATT: So which regions of the world -- I know you don't like to talk about specific countries, but which regions of the world do you see the greatest opportunities?
MILLS: You know, emerging markets, the fundamentals are still great. But at the same time, the stocks have done so well, valuations are very rich and in some cases we think the stocks have overshot the fundamentals. SO if you are a growth investor, you may still like emerging markets. As a value investor, I have been reducing positions there before I find the valuations a bit stretched. We still like Europe valuations are still strong. Many companies in Europe are benefiting from that emerging market growth by exporting to places like China and building out eastern Europe. There are lots of good opportunities there still and again the valuations there are very attractive on whether one looks at P/E ratios or dividend yields on any basis we find lots of good opportunities.
PRATT: What about Japan? Japan has not performed well for the last several years. Do you think that there are any chances for the story to change there?
MILLS: There are always chances. I think as China becomes more of a factor in the world, that Japan will be under more pressure to institute reforms. We saw a window open with Prime Minister Koizumi and now it seems to be closing again in terms of reforming the government, reforming the corporate sector in Japan. The Japanese market did quite well a few years ago. The economy has at least recovered a bit, but it's been mainly export- led and we really need to see the domestic consumption pick up in Japan but at the same time there are demographic headwinds that are probably preventing that from happening at least in a big way.
PRATT: Does the story change for you at all if the U.S. goes into recession? Are there areas that look more appetizing and maybe areas that look less promising?
MILLS: If the sub-prime crisis is any indicator, emerging markets may hold up better than we think. That certainly spread to Europe and Japan to some extent and less so in emerging markets. That was more of a financial crisis. If we have economic pullback in the U.S., I'm of the camp that would think that that's still going to matter in emerging markets and Europe across the world. There's another camp that says things have changed, that consumption has picked up around the world. There's more trade between countries that doesn't involve the U.S. and therefore that economies outside the U.S. won't catch the proverb cold just because - or won't sneeze when the U.S. catches a cold. I think that those other countries may still catch a cold from the U.S. getting sick.
PRATT: Most financial planners recommend that investors -- U.S. investors put 20 percent, 25 percent of their portfolio into international stocks. Do you think that the global landscape is changing so that maybe that number needs to be upped a bit, maybe to 40 percent, I have heard some people say?
MILLS: I think so aggregate. For any individual investor, it really depends on their own risk tolerance and their own financial situation. In aggregate, it seems like it should come up. If you look at all the improvements that have happened around the world in terms of corporate governance, in terms of profitability as we mentioned, that would argue that there are better investment opportunities outside the U.S. than there were before. If you just look at market capitalization, over half of the market cap in the world is now outside the U.S. So if some one is only investing say 20 percent of their equity allocation outside the U.S., they're really missing a lot of the opportunities.
PRATT: So 40 could be the new 20 or 30 could be the new 20.
MILLS: Again, it depends on the person's particular circumstance. But in aggregate, 30 or 40 might make sense for a lot of people.
PRATT: OK, let's leave it there. Ray, thanks for joining me this evening.
MILLS: Thank you Suzanne.
PRATT: My guest Ray Mills of T. Rowe Price.
