Hello and welcome to The Download. I'm your host, Dave Richardson. As you can see, we've got a cool new setup here. We're getting quite professional now that our listenership has gotten to the levels that it's risen to. Also, thank you for sending notes in that you wanted us to work a little bit on the sound. We've done that because we have the ability to do this, so it's going to be pretty good. By the way, the fault's all mine. They bought me fancy headsets, and then I kept forgetting them when it was time to record the podcast. That's how high-end a podcast this is. It's a bit of a surprise that we've got all the way from London, England, Dave Lambert. Dave, welcome to this new setup as our first guest in the fancy setup.

Thank you. I couldn't not come once I heard the setup was like this. It's a vast improvement.

A vast improvement. David and I were just discussing what we might talk about when it comes to European equities. Of course, David is the head of European equities at RBC Global Asset Management. We're going to say pretty much the same thing that he said the last time. It's very important that you listen because what he said was right. David just flew over here to do this podcast and it's a victory lap for him because no one's ever been more accurate on these podcasts than him. David, you nailed everything, right? European equities have been fabulous. That's what you told everybody. Particularly in Canadian dollar terms, it's been amazing.

Yeah, to caveat that, when we spoke last time, Europe had a very good run for the first part of the year. Then it's consolidated, gone sideways. We digest those re-ratings. But in most recent weeks we've seen it pop up, break up above the previous highs. So that consolidation phase, we always like to see that digestion phase within the market. But yeah, so we have. If we look at it in Canadian dollar terms, year to date, last week, we were up 25% plus in Canadian dollar terms for Europe. That compares favorably with the US, but other countries around the world, although international markets have done particularly well. So, yeah, we've done well. But since I last spoke, we've tracked sideways and more recently started to improve.

Wow. But to be fair, we've been talking about this for a while now. We always have David on to kick off it every year. In January of 2024, we did our preview of European markets then. And that was really the point where you wanted to listen closely in terms of the opportunities that existed outside of the US where everyone's been focused, but particularly at Europe, that's where you really laid out the case for why it wouldn't be unreasonable to expect European equities to do relatively well from that point because of where they sat, not even two years ago.

Yeah, and that case remains because from a relative valuation standpoint, although absolutely euro is re-rated, we're still not within the bounds of where we've been historically, but relative to the US, we're back below two standard deviations. It’s cheap. So on a relative basis, Europe, the setup is still cheap. What has changed is going into next year. Now we're looking at 2026 earnings. And ultimately, 2025 has been a year of flat to deminimus earnings growth in Europe. But next year, we're looking at earnings growth and expectations at the moment of 14%, which is comparable to numbers I've seen for the US today at 13%. We might actually be seeing earnings growth superior in Europe relative to the US, which is something we haven't seen a lot at all, really, over the last 15 to 20 years. If we have that with the valuation set up, then it's really quite interesting for Europe as a whole. To be honest, a bulk of that has to do with domestic Europe improving. I've talked for years about when you're looking for good businesses in Europe, we like these companies that are globally based, can allocate capital wherever they see fit, and can take advantage of good earnings growth in other parts of the globe. We've always looked at international earners from a revenue and earnings perspective. But now, with what's happening in Germany—and I spoke about that last time I was on the podcast—we're actually seeing some growth coming through in Europe. So all those domestically-orientated sectors, utilities, telcos, banks, we've got this third leg. As a revenue stool of Europe, emerging markets and the US, that European leg is now going to give some support to the earnings growth. Actually, I don't see this as potentially an aberration for 2026. It could just mean that that gap, the earnings differential between the US and Europe, might be a little bit narrower than it has been historically, which bodes well given the valuation differential.

Yeah, and this is when things get exciting because the valuation story is always interesting. We like to buy stuff cheap. We're heading into a Canadian winter here. I can go buy a pair of mittens with holes in them at the clearance store, and I'm not going to have warm hands, so it's not that exciting. But when I go and I buy a really nice pair of gloves that are going to keep me warm through the winter at a fair price, and it's actually going to do something for me, that's when I'm a little bit more interested. Again, as you said, the valuation story was there for a long time, but what you needed to see was the growth and the growth in earnings story follow along. That's really what you were talking about last time. This is more of an update to say that, hey, you're now really seeing evidence that this is going to produce itself over the next 12 months.

Absolutely. This is what consensus thinks. This is how it looks to us as well. I mean, things can change, and we're constantly monitoring those things, but ultimately, that's it. Once you get growth coming through in areas of the market that weren't growing with fixed cost base that are large, then you get operational gearing coming through quite quickly. Only a modicum of growth can really accelerate on the earnings side. I think that's really interesting and exciting. Clearly, we have to caveat everything to say we want to see the German fiscal stimulus plan go through, and we are starting to see some orders on the defense side come through. We would like to see France sort this political situation out. There's things happening as we speak today in terms of the Prime Minister who had resigned and now is back in situ and now is going to have a vote of confidence, but has done things to appease the Socialists. It's a constant moving fee. We always have to check—and that's our job, right?—that the background environment is stable enough for us to be confident. But again, notwithstanding all of that, and they do impact the macro, we'd still focus on the micro, what the businesses do themselves. I always try to tell the listeners on these podcasts that it's all about the corporates, it's all about the micro, it's what the corporates do. Actually, the French political situation, although it will affect risk premiums, is not going to affect what a lot of the businesses, even in France, are doing, maybe some of the domestically exposed sectors. It's about constantly focusing on the micro, the businesses themselves, those great businesses that we have in Europe. The other thing I would add to that is that we've been in a period where Europe has performed quite well, where we've seen high-risk low-quality names perform quite well and lead the market, which is interesting, but that's also meant that some of these higher-quality compounded names are actually relatively derated. Within Europe itself, we've got this potential for the setup of the quality compounding part of the market being cheaper than it was. I find that set up really interesting because we'll see cycles in the market and we would expect quality to start to perform much better. It's been a very big laggard over the last 12 months to come through, and that would really suit us and suit our portfolios.

Well, now you've got that thick Maltese accent that I'm sure people have picked up on, but for some reason, you've got a particular expertise in the UK as well. Is the UK the same as broader Europe? Are they moving together or are there different things happening in the UK? And then what are your thoughts on that?

Yeah, there's different things happening in the UK. I've just seen an IMF report to suggest that the UK will be the second fastest growing in the G7 next year. We've had a labor government in situ now for 18 months, and they're trying to do the right things, although these things are very difficult from a tough starting point. But ultimately, when we think of the equity markets in the UK, they're looking cheap, actually, even on an absolute basis. I said Europe had re-rated. The UK has continued to really bump along the bottom of the relative valuation bands. Again, from an earnings perspective, not maybe as fast as Europe as a whole, but decent. Again, we would expect the UK to be a decent place. What we have to remember with the UK is that when we're buying UK equities, typically we're buying global franchises. We've got global banks, we've got global mining companies, we've got global pharmaceutical companies. You're not really buying into the UK. If you really want exposure to the UK, you're going into the mid-cap land, the FTSE 250, which we do in our portfolios, in our mid-cap portfolios and our large-cap portfolios. We think the outlook looks okay for the UK, but there's not too much to get really excited about, whereas Europe has this distinct stimulus coming through, which we think means that the incremental growth will be higher, and we think the market is not baking that in at all, which means that we could see some meaningful uplift on the valuations.

And your favorite football team this year?

My favorite football team this year is Charlton. We're in the championship second tier, and we started reasonably well. We're mid-table. We'll take that. If there's a correlation between European markets and my football team, it seems to be correlating highly positively right now.

Lots of things to celebrate for Mr. Lambert, which is always great to see. I'm so glad we actually get to do this face-to-face this time, and in Canada. When we were talking last, you talked about a couple of areas, a couple of sectors that you like. You talked about the banks in Europe, and then I think you already mentioned defense. Are those still two sectors you expect to lead, or is that performance in the past, and you're looking at some other areas? What are you really focused on in terms of your European holdings right now?

Yeah, we expect banks to continue to lead. We still think there's actually loan growth coming through. Some of the Spanish banks we've been talking to are talking a nearly double-digit loan growth, considering we saw no loan growth for a long period of time within Europe. Balanced sheets are sorted, valuations are still low. You've got nice distributions coming to shareholders. We still think banks will lead. Defense is an interesting one. We've had a massive re-rating. Now, I do think the earnings trajectory for these companies is set fair for the medium term, but we've had a hell of a run. I think they're not going to repeat. Some of these names are up 80, 90, 100% on the year. Are we going to get that over the next 12 months? No. But if we think of the earnings trajectory, we could see comfortable 10 to 20% earnings growth the next few years. I think some of these defense companies will just work into their rating. They'll gradually derate just by the earnings going up quite aggressively. But I would say that we've been reducing a little bit of defense, but still want active exposure. I still think it's really interesting. If you got a correction in the market, given what we've seen in Israel, and if we see anything in Russia and Ukraine, if that peace dividend brings the share prices down, we could find, actually, a good time to deploy more capital there. The other parts of the market that I think are interesting but too early, healthcare started to perform a lot better, which is really interesting. It's been in the doldrums for a long period of time. It's a cheap sector, it's a global sector. Clearly, there's been a lot of rhetoric coming out of the US in terms of favored nation pricing. But it feels like these clouds are passing a little bit. It's all idiosyncratic with healthcare because there's names that have different portfolios. But healthcare is performing a lot better on low valuations. If we continue seeing those earnings upgrades coming through, we'd continue to add there. The place I want to keep an eye on is the defensive part of the market because it's really been beaten up. Consumers, actually, as a whole, consumer staples and consumer discretionary, we're seeing signs of life in luxury, which is an area we've liked. In fact, just before I came down here, LVMH have published their Q3 numbers, which are better than consensus, are seeing a stabilization with minor improvement on wines and spirits, and fashions and leather goods not being as bad. The markets sniff this a little bit, and they've started to base, but we're keeping an eye on things like that. It's always important, we look at upgrades, because if we want to see analysts upgrading their numbers, which means earnings are growing and people are behind the curve, which is how you get relative performance. We're keeping an eye on these things, but the valuations for the consumer space are low and lower than they have been for a number of years. If we start to see these earnings come through—this is stabilization and again, I always talk about this second derivative, things getting less worse—actually, it could be quite interesting. So consumer, an area where we're underweight at the moment, but we're keeping an eye on it. I think the set-up, valuation-wise, could be quite interesting. But you need to see a lot of things move into place. But as always, the whole market, we're always looking at everything, and that's the nature of the beast.

One of the things that we haven't touched on a lot in your previous appearances. And by the way, you can download, you can subscribe to the podcast wherever you get your podcast, or I guess you're watching us on YouTube here. You can also subscribe on YouTube and give us a rating. We'd like to hear what you have to say. Maybe you love the new sound of David. David, by the way, used to work in radio. Nighttime radio at university, right David?

Yeah, it was the dulcet tones.

You do have that great voice. I'm starting to hear more of a British accent now, too. Maybe I was a little bit off. Maybe I need my headphones on. But when we talk about really any area of the world right now, and the big story in markets is artificial intelligence. I know Europe wants to play a key role in this, and they know they need to be there. But where is Europe relative to the US and China? Because that's where we hear all the talk.

Yeah, and I think it's fair to say, technology in Europe is not a big sector. We've got two big, large companies, ASML and SAP, which dominate the tech space. But as a percentage of the market, it's 5%, roughly, give or take. We don't have the pics and shovels for AI that you see coming out of China and the US. But there are other aspects. We have got lithography, which is ASML, and I've talked about industrial automation quite a lot, but in terms of the data centers—building the data centers, energy efficiency, etc.— which is very key for building AI infrastructure, we've got a lot of that in Europe. We don't have those explicit AI play, but there are many companies, particularly in the industrial space, that have a good chunk of revenues that are exposed to the AI theme and building the AI theme out, which has got lags. Everyone's going to be carrying on building it. In fact, some ways it should be less cyclical because those picks and shovels will come and go, whereas these guys are the only guys that can really buy these big data centers, low energy efficiency, good energy efficiency. We have that. That's why when you see the AI theme really go, Europe does get left behind. But what's quite interesting is that the AI theme, although rolled over at the beginning of the year, really has come back with a vengeance the second half of the year. But you're still seeing Europe on a year-to-date basis up 25% absolute, and relative to the S&P 500 in Canadian dollars around 12, 13%, which is fascinating. You always get signals from the market when underneath the hood, even though the AI theme is traveling well, but Europe continues to travel well. There are aspects, and we monitor these things. We try to track the themes within the portfolio to make sure we're not over-exposing because people talk about bubbles, and I don't know if it's a bubble or not, and you never know until after the event, but we do like to monitor our exposures to make sure we're not overly exposed in certain areas. If it does get out of too high, we start to bring it back in.

Yeah. Just a couple of big points on Europe is, I think sometimes here in Canada, we forget how big a market the European market is. Of course, the US gets a lot of our attention. We hear a lot about Asia, China, but people forget that there's 450 million people in the European Union. That's a massive amount of consumers. There's a massive amount of companies that have been around for decades, if not centuries, in many cases. Then with the US dollar weakness, one of the primary beneficiaries has been the euro. Whereas the Canadian dollar tends to move a little bit more in tandem with the US, particularly early in the down cycle for the US dollar, the euro has appreciated significantly, about 10% against the US dollar. And I think from the bottom, we're up about 15% against the Canadian dollar. When you go and invest in Europe, you take your Canadian dollars, you switch them to euros, and then if you bring them back, you get that profit on top. That's why the returns have been so good in Canadian dollar terms.

Yeah, exactly. But obviously, the fluctuations in the currency is something we have to deal with as well on a company-by-company basis because the exporters with a stronger euro would suffer. As a consequence, you start to see the earnings come down. So although the asset itself is traveling well because it's in euros, the underlying earnings do get impacted. But that's the day-to-day job in assessing that on a company-by-company basis. But ultimately, yes, you're right. It really does throw the whole asset class into the melting pot. Diversification. We should have exposure here with a strong currency or not a weak currency to spin that with now earnings growth of 14% next year. All right, if the euro was really strong from here, maybe that 14 starts to come down to 10, but then your asset class goes up as well. You see you've got these to and fro going on there. Absolutely, I think it all leads to with the setup to, again, bang the table to say Europe deserves a place within a diversified portfolio and offering because it gives you something different. It is the most diversified market, revenue, and earnings base globally. Whereas if you're invested in the US, there's much more domestic focus there. You're on good value, attractive valuations with stimulus coming down the line. It's a time to get excited, but I've been a European investor for a long time, and so you always try to rein that in because something comes from left field as a headline, and more so right now. But that's the job, and we keep on checking. But the underlying fundamentals are in pretty good shape.

That's really what we wanted to talk about today. Again, we highlighted the opportunity a couple of years ago. We highlighted the takeoff earlier this year. Then what you wanted to confirm today is that things remain in place for good performance in Europe. That point on diversification is really important. For Canadian investors, we get lots of banks here in Canada. We get lots of mining and oil energy. In the US now, because of the outperformance of technology, the S&P 500 has a lot of tech. When you actually look for, and you say, what's the most diversified market? As you said, it is the European market and everything that you have there.

Yeah, absolutely. I think it bodes well.

If you're worried about overvaluation in tech, that's where you could see some of the volatility. If you look just over the last week, where we've seen some of that volatility with trade issues between the US and China, that's generally been centered in the tech area. You've got, as we mentioned, some exposure. That's good. Some advantages that European companies are going to be able to take out of artificial intelligence. But you don't have that over exposure in any of these areas, particularly tech. With your valuations, that softens your volatility, which always makes it a better experience for an investor to hold.

That's right. I'd say the biggest exposures from a European perspective are always financials and industrials to a degree. Financials, I've already talked about the valuations being low and loan growth coming through. I think that's set fair. Industrials, cyclicality has been performing well, but again, a sector that's not particularly highly valued. The two big sectors, 20% each, look to be, I don't want to say safe, but the downside protection is there. I think that's very important. I've always said as well that for Europe to perform well, you need the financials to be steady. Coming out of the financial crisis, it took 10 years or so to really get these banks back into shape, but it feels as though we have done that now. I think that's really important for Europe to kick on forward.

Well, David, thanks for stopping by. No one's ever complimented my voice, but I'm sure we're going to get a lot of compliments in the notes and comments on your voice because you're just sounding fabulous today. All the overnight flight didn't affect you. You're smiling and everything. You're smiling because things are going well, and that's ultimately what you want as an investment manager. You want the people who are investing with you to do well, so it always feels good. You're always in a better mood when things are going as well as they are right now. Congratulations on that, and hopefully you'll stop by again for our cool new setup.

Absolutely. Thanks, Dave.