It's the mission of Riad Younes, who runs the Julius Baer International Equity Fund (BJBIX) with fellow manager Richard Pell, to find attractive investments in foreign lands. He has been bullish on Eastern Europe, and is also buying some Japanese companies and looking for new names that are taking advantage of China's widely expanding economy.
For the second year, Younes is a winner of the S&P/BusinessWeek Excellence in Fund Management Awards. BusinessWeek Online's Karyn McCormack caught up with Younes in his New York office a few days before his next trip to China and Japan. Edited excerpts of their conversation follow:
Q: Before we talk about the foreign markets, what's your take on the U.S. market? It has been wavering around.
A: We believe the U.S. economy is running on a sugar diet, and sugar diets are initially good because you feel the sugar rush, but they last for a short time period, and then you get a sugar crash. So it's not really a healthy diet. Therefore, we believe this diet of very easy fiscal and monetary policies is creating short-term economic momentum in the U.S. economy. Soon, we will have to reduce at least the fiscal stimulus because of the huge budget deficit we have now.
We need to restructure. I'm fine with the fiscal stimulus out of the way or at least muted. We're going to see continued economic weakness in the U.S. economy, and renewed weakness in asset prices, whether it's housing or the equity market.
Q: Last year you were very bullish on Eastern Europe. Do you still like the region?
A: Yes, we still are because this region is going through a big structural change. It's a once-in-a-lifetime opportunity. This region was basically, 15 years ago, a part of the Soviet empire, and then after the Wall went down there have been efforts by Western Europe to reunite Europe again. Therefore, they provided these countries with a gift, like a roadmap for them to rejoin and become part of Western Europe.
And that map is joining the European Union (EU). And many of them, at least 10 of them, will qualify this May. Depending how well they do...with the Maastricht criteria, they could have their currency dropped and become a euro-currency economy. We believe by 2010, almost all countries would have the euro as their currency.
So this is a quantum leap from being an emerging market with exotic currencies that nobody wants to hold to practically becoming a First World economy with a hard currency, with very low interest rates, which are going to stimulate economic development and consumer borrowing. Let's not forget the billions of euros in aid that are going to be channeled from the EU to these new members.
Another incentive is the prospect of independence, of whether or not the U.S. economy retracts. Almost every market -- whether it's Western Europe, Japan, Asia, Latin America -- is going to be very highly sensitive to any economic slowdown or equity-price correction in the U.S. I believe that the region will be almost immune from any serious weakness in the U.S. equity market as long as they're making progress toward joining the EU.
Q: Which countries are you talking about?
A: I'm talking mostly about Poland, Hungary, and the Czech Republic. A little bit about Austria, because many Austrian companies are heavily investing in that region, and to a lesser extent, in Russia and Romania, maybe also Turkey -- but it's a longer shot because Turkey also has the chance of joining the EU at a much later date and has been improving substantially over the last 12 months.
Q: What's the most important investment theme you're playing now?
A: We like 3G, which is the third generation for mobile technology. First, we had the analog system -- it was 1G, or "first generation" in mobile. Then we went to GSM, or digital mobile technology, which was second generation. 3G was supposed to start almost three years ago, but sometimes glitches and problems show up when you don't expect them or certain problems do not get resolved as quickly as people hope.
So after frustration, and two years worth of delay, we're now starting to hear very strong signals from industry leaders that all the bugs really have been resolved. And therefore, we can see by the end of this year and through 2005, 2006, and 2007 as this technology improves, huge growth in third-generation mobile.
You're going to see new gadgets with exciting new applications. You're going to see consumer demand for those products. So third-generation mobile-technology companies are going to be really attractive over the next three to five years. They're going to have above-average growth rates.
The second one that we like is Turkey and Russia. We like Russia because it's independent of whether or not the U.S. economy slows down, which is very crucial. It's purely driven by reforms. The more Russia undertakes reform, the better the equity market will do. So for us, this is purely a bet on reform, which we see [that already] evident and [about] to accelerate after the election. Therefore, the market remains very cheap, despite the recent run.
Turkey, as we said, is a bit more speculative, but the upside could be huge. It's more like a 5- or 10-year investment horizon, and again, it's based on the premise that Turkey's prospect to join the EU will improve over time. As this improvement becomes evident, then it will start to be discounted in the stock prices. Therefore, we expect the stock prices to outperform the global world equity markets.
Sector-wise in Europe, we believe over the next two to three years that we're going to see a lot of consolidation in the banking sector, mostly in the Italian and German markets, which are the most fragmented. So we could see very strong performers in the banking sector in Europe, mainly driven by M&A activities.
Q: Tell us about some of the stocks you like in 3G.
A: I would mention Nokia (NOK), which is a very obvious choice. It's the world leader in handsets. I think they have about 40% market share in GSM, which is the second generation technology. And in 3G, they will be able to maintain a similar market share.
For us, Nokia's valuation also remains attractive, compared to other technology companies. It [didn't rally] last year, like many other tech companies. This year it's doing well, [and] I think it's going to continue to do very well. So we believe Nokia is a key investment holding for those companies who are leveraged to 3G.
I would add also Ericsson (ERICY). It's another big player in mobile. They had huge problems the last two to three years -- mostly balance-sheet and production problems. But we believe now that the joint venture with Sony (SNE) is working out well, and as 3G gets commercialized and widely adopted, it's going to be leveraged to demand from the handset side -- and also from the infrastructure side, as carriers start to buy the equipment to provide the services and the consumer buys the handset to use the services.
So we believe Nokia and Ericsson are two liquid and well-valued companies that will be leveraged to the explosive growth [in 3G] that we anticipate over the next three to five years.
Q: What about the banks
A: I'd mention Capitalia in Italy. And then in Germany, there are three banks: Deutsche Bank (DB), Commerzebank (CRZBY), and Hypo Vereinsbank.
Q: China has been a hot topic. What do you think?
A: We like Japanese companies that are highly leveraged to China growth. In the short term, there could be some slowdown because of overheating in China. And we believe if that were to occur and some corrections were to happen, then people should take advantage and buy companies that are leveraged to the secular growth of China because real money is going to China.
You don't want to make a decision based on where portfolio managers are going. But when foreign direct investment goes to a country and in big amounts -- I mean, last year China attracted more FDI than the U.S. itself. That's a big statement.
So companies across the world -- Americans, Europeans, Asians -- are really rushing into China and building a capacity...and trying to gain market share in that very important dynamic economy. For us, the writing is on the wall. If not a fad, China is almost like the U.S. in 1900. So it's not a stretch of the imagination, in 50 years, that China will be the biggest economy in the world.
Q: Which companies do you own now as a play on China?
A: I could mention Shiseido, a Japanese cosmetics maker, and Unicharm, which is a paper hygiene company. We think those two companies have some nice presence.
I think also the auto industry -- Nissan, Toyota, and Honda -- will have a joint venture in China with domestic players. The Japanese auto manufacturers are a little bit late behind the Europeans, but they have been very active in building market share. I would expect over time that the Japanese auto makers will be significant winners from the Chinese consumer growth.
Q: Do you like any emerging markets in Asia or Latin America?
A: Short-term, we like Korea because we believe it's cheap compared to the region. Medium- to long-term, we aren't that excited because we believe China is going to create competitive pressure on them.
India also looks very interesting. Everybody talks about China, blah-blah-blah. But we believe India could be equally dynamic and challenging. Right now, they've been only getting mostly the service sector, outsourcing. But when I talk to many Indians, I believe they realize they are missing the opportunity of being also the world manufacturing outsourcing base. They feel they have the labor skills. They feel they are as competitive as China.
But India has a lot of political instability and bureaucracy. There's also a lack of infrastructure. So I think the Indian government and the Indian private sectors will become much more pragmatic and progressive and aggressive in trying to attract a lot of the manufacturing base that's going only to China.
I think India could become a wild card in the future and could be a very interesting opportunity to invest in. We believe the banking sector, at least for now, is the safest, the most logical, and the obvious starting point.