Episode Summary
Executive Summary: This episode examines why international and emerging market stocks are suddenly attracting attention after years of U.S. dominance. Raul Sharma argues the shift is being driven by catalysts such as Europe’s fiscal rearmament, bank consolidation, a potential weaker dollar, and improved sentiment toward Chinese tech, not just cheap valuations. He explains how his dividend-focused, active approach seeks out undervalued, high-quality non-U.S. companies benefiting from these shifts.
Main Topics: The rebound in international stocks (Priority: 5/5): The hosts and Raul discuss why investors are reconsidering non-U.S. equities after a long period of U.S. outperformance and persistent skepticism toward international markets. Europe’s fiscal shift and policy catalysts (Priority: 5/5): Raul highlights Germany and broader Europe moving from austerity toward higher defense, infrastructure, and industrial spending, which could support earnings growth and broader market spillovers. China tech and AI as a new catalyst (Priority: 4/5): The conversation covers DeepSeek, Alibaba, and the possibility that Chinese internet and AI-related companies are becoming more competitive and newly supported by Beijing. Dividend strategy and active management (Priority: 4/5): Raul explains why Schaefer Cullen targets dividend-paying international and emerging market stocks, emphasizing valuation discipline, dividend growth, and flexibility versus passive ETFs. Dollar weakness as a tailwind (Priority: 5/5): A falling U.S. dollar is presented as one of the strongest historical drivers of non-U.S. equity outperformance, and possibly a future catalyst if Trump-era policies weaken the dollar. Portfolio construction and country selection (Priority: 4/5): Raul describes combining bottom-up stock selection with top-down country analysis to avoid political, currency, and sanctions risk while finding mispriced opportunities.
Key Arguments: International equities are finally getting catalysts, not just cheap valuations, which is what has been missing for years. Trump-era pressure is pushing Europe and other regions to make long-delayed structural changes, especially in defense, infrastructure, and consolidation. A weaker U.S. dollar would likely amplify non-U.S. returns, and history suggests international and emerging markets benefit strongly when the dollar falls. Chinese internet and AI companies may be more competitive than investors assumed, and some now trade at large valuation discounts to U.S. peers. Active dividend investing can outperform passive exposure by navigating dividend cuts, geopolitical shocks, and country-specific risks faster than ETFs. Non-U.S. multinationals can provide cheaper exposure to global revenue streams, sometimes even to U.S. economic activity, at lower valuations than domestic peers.
Data Points: MSCI World non-U.S. equity weight: about 30% - Raul said this is well below the long-term average and signals room for mean reversion. Long-term average non-U.S. equity weight in MSCI World: over 45% - Used to show how far international stocks remain out of favor. Japan boom era non-U.S. weight: well over 65% - Historical comparison showing how much higher international weightings once were. Non-U.S. stock valuations vs U.S. peers: about 25% cheaper - Raul said many international multinationals trade at a large discount versus comparable U.S. companies. Yield premium outside the U.S.: approximately 50% higher - Raul attributed this to both cheaper prices and a stronger dividend culture. Chinese AI/Internet companies vs U.S. equivalents: some 50% cheaper - Raul said Chinese firms in enabling AI technologies are much cheaper than comparable U.S. names. International developed market returns during dollar declines: about 25% average performance with a 90% hit rate - Raul cited historical data on MSCI EFA during periods when the dollar weakened. Emerging market returns during dollar declines: over 40% average performance with an 80% hit rate - Raul cited historical data showing EM is especially sensitive to a falling dollar. Initial screening universe in emerging markets: about 850 stocks - Stocks meeting the firm’s value and dividend screens in EM. Initial screening universe in developed international markets: about 600 stocks - Stocks meeting the firm’s value and dividend screens in developed ex-U.S. markets. Portfolio size: EM: 50-70 names; International: 35-45 names - Raul described the concentration level of the firm’s strategies. Revenue comparison to U.S. peers: about 60% of portfolio names are 25% cheaper and yield double - He said many holdings are global multinationals with similar business profiles but better valuations. Dividend growth during 2021: best year for dividend growth in their history - Raul used this as an example of active management benefiting from changing dividend environments.
Pivotal Quotes: "I think, first of all, the correction in the MAG-7 that we saw at the beginning of the year, I think that was kind of the start of it." — Raul Sharma: Explaining why investor interest in international stocks revived after mega-cap U.S. weakness. "Cheap stocks with a positive catalyst, great things can happen." — Raul Sharma: Summarizing the investment case for international and emerging market equities. "You haven't missed it at all." — Raul Sharma: Reassuring listeners worried they are too late to benefit from the international rotation.
Implications: Listeners should view the international rotation as potentially early rather than exhausted. If fiscal stimulus, a weaker dollar, and better earnings growth persist, active non-U.S. dividend strategies may continue to outperform passive U.S.-centric allocations.
About Animal Spirits Podcast
Animal Spirits is a show about markets, life, and investing. Join Michael Batnick and Ben Carlson as they talk about what they're reading, writing, listening to and watching. Look for new episodes every Wednesday morning. See our disclosures here - https://ritholtzwealth.com/podcast-youtube-disclosures/