Hello and welcome to The Download. I'm your host, Dave Richardson, and we have Dave Lambert here. Now, if you’ve subscribed to the podcast and you've been listening to the various episodes for the last five years now, Dave has been a regular guest, but this is the first time that we've had you on live. We've usually had you from across the pond on a virtual interaction, over Webex or whatever software we use to do these, but it's great to have you here in Toronto.

It's great to be doing these things. It's always much nicer doing it face-to-face. The energy's there. It's always harder through the Webex.

Always. We're here in the fabulous Download studios. We just recently built this. My wife and kids were finishing off everything over the weekend. It's quite a facility. So this will be where we'll be doing the podcast regularly from now on.

Well, I'm willing to be the first one.

It's actually my boss's boardroom. He let me in today, and he’ll probably let me in another time. So Dave, you're all things Europe and UK. What is your official title right now? We should probably mark that down.

It's senior portfolio manager and head of European equities.

Head of European equities, and we lump the UK into that. And I think what's been interesting is we're still at a point this year, if we look at the calendar year, certainly since the tariff announcement started to really ratchet up in late January, we've seen European markets have done relatively well on a global level.

Yeah, absolutely. We've seen, year to date, European markets have been leading the way. Emergent markets have always been strong as well, but effectively it's global ex-US, which has been performing a lot better. But it's unusual. We haven't seen that. We saw a period in mid-2022 through to 2023 when international markets started to perform. In Europe in particular, we're seeing that. I think we've rallied almost 28% relative versus the US since the back end of last year. It's nice to see international markets leading the way. It means you have more questions, more people coming in, maybe looking to diversify away from the one-way trade of being long with the US since the financial crisis. European markets have been strong, and some of that has been earnings-led, but a lot of that is starting from low valuations and using that low valuation base, one, as a cushion to any downdrafts, but two, to start to gently re-rate. So that's what led to the outperformance.

We've talked a lot on this podcast over the years about the idea that we love to buy stuff when the valuations are lower. Just like when we're out shopping, we love to buy stuff on sale, to get a bigger sale. The bigger the sale, the better. But what valuation doesn't do when we're talking about stocks is provide you, for the lack of a better term, a timing mechanism. Things can stay undervalued or overvalued for an extended period of time, and then you need some kind of trigger to make those valuations change. And again, we'd love you to subscribe. Subscribe on YouTube now where this video is playing. You can subscribe on any of the places that you listen to the podcast. We'd love you to be a regular listener to the Download. It's one of the fastest-growing podcasts anywhere, Dave, did you know that?

I didn't know.

You probably would have turned it down if you'd known that. There's a lot of pressure on you. But the idea that we talked about for a long time, that the US was going this direction, the rest of the world was going like this, and you end up getting a fairly big gap. And whether we're talking about Europe, about Canada, about emerging markets, really, as you say, ex-US, global equities. At some point, you are going to start to see people look at other options. The trigger was, I guess, in some ways, what happened with announcements around tariffs in the US. But as you suggest, and when I was over in London a couple of months, the last time I saw you, a big announcement out of Germany. As you look at it, the trigger for this shift, what do you put more weight on? The tariffs or just that German announcement?

Yeah, I think the tariffs are a lot of noise. We don't know how they're going to manifest themselves. We've had a 90-day kick down the road rhetoric coming out, and that could be another 90 days. We don't know. You can't really plan for it. That's a problem for corporates because they can't plan for it. But what has changed since we last spoke was announcement out of Germany mid-March on huge fiscal stimulus. Germany have had this fiscal break imposed on themselves for a long period of time now. Obviously, that's kept their deficit in nice order, but obviously, it hasn't led to a lot of growth and incremental spending. Now, what's come out? They've looked at half a trillion worth of spending on infrastructure and 400 billion on defense. On top of that, the rest of Europe has said they will rearm as well. Some of the spending on defense is not being counted in these fiscal rules. In fact, they've got a free pass to spend on defense. But ultimately, you've come from a period where there's been no spending to a huge stimulus of spending. I've seen numbers out there, the infrastructure spend on its own could add 50 bps a year on GDP, which is significant because we've been looking at economies in Europe which have been growing between 0 and 1%, pretty pedestrian. But if all of a sudden you're looking at 1 or 2%, maybe 2% plus, if all of these things happen, maybe you get supranational debt issued or debt utilization, which would be very big things for Europe. I don't anticipate that happening anytime soon. But I think the most important thing is the mindset shift. What we've seen is this the phoenix from the flame’s moment. The mindset shift is maybe a little bit more pro-growth and this fiscal multiplier could start to take effect. Then ultimately, if we've got the domestic economies doing a lot better, infrastructure spend, defense spend. For so long, since I've been investing in European markets, really to get higher returns and better growth profiles of businesses, you've had to look at international businesses, looking for emerging markets or the US, for instance, and the European portion has always been a bit of a lag of. If that's changing, then that's great for all these European businesses that are still international, but actually, domestic franchises like telecoms, banks, utilities, other parts of construction, all of a sudden, the growth profile pick up. When you get more growth, you get operational gearing, so returns and margins start to pick up as well. We see this double kicker. I don't think the market on current valuations is really, as it shouldn't just be yet, given any credit to this because obviously, these spending take a long time to manifest. We wouldn't be looking at anything happening until next year at the earliest. But it is a medium- and a long-term phenomenon, which I think could really structurally change the long-term GDP growth and potential earnings growth for Europe. Then if we look at it versus the US, when you were talking about that wedge of the earnings in superiority you've seen in the US capital with the re-ratings, we've seen both. Maybe the earnings don't grow as fast, they grow similarly Europe versus the US. And as a consequence, those ratings as well then start to converge. I don't necessarily think they should converge all the way because the US has got some huge global gorilla businesses that just dominate and on very high returns. But ultimately, I think the set up for Europe, these valuations and the potential for improved growth is very interesting. It's something we haven't seen for a considerable period of time.

So I think of myself as an investor, and other Canadian investors, global investors for that matter, we might look at Europe as a really nice place for summer vacation. I prefer the shoulder seasons, actually, this time of year, maybe September, October. But not a place where there's a whole lot going on economically. They're old, stagnant economies. You've got Eastern Europe and the addition of Eastern Europe into the European Union, those countries which are lacking infrastructure. There are all kinds of issues there. So it's not necessarily a place you think of as exciting for investing compared to the US or maybe even Canada for that matter. As you say, it's still a bit of a wait-and-see. But is this a time when you're actually fairly confident that this is really a step forward and people should really be looking at this opportunity?

Yeah, I think this is definitely something that's new. So we should be taking notice of it. And positioning from an asset allocation perspective, you just can't leave Europe on the side now, if this comes to pass. We've been notwithstanding that. I was looking at some charts this morning—I think we talked about this as well last time we did a podcast—the growth of the German economy through 2023 and 2024, which was negative and then flat. The DAX was up 17% and 20%, and the DAX has outperformed over the last five years, versus the S&P on a common currency. If you take the five-year number from today, it's outperforming the S&P. Beginning of 2021, it's outperforming. You don't necessarily need to see growth in the economy. You just need to be invested in companies that can take advantage of that growth. We've got lots of great companies in Europe that can do that. But I think that pool of companies that can take advantage of growth grows as you get that plug of Europe actually with some stimulus behind it. It makes the opportunity set that much greater and therefore makes Europe on aggregate a more attractive place to be looking to invest.

Like you say, not just companies, as you've been focusing on, that do a lot of their business outside of Europe. In the US, in Asia. But now you can actually look at companies that are generating the bulk of their revenue just within Europe. And the banks, as you mentioned, are something that you're pretty excited about.

Yeah, that's exactly it. I see they’re the poster child, but what's going on, tough regulatory environment, which has served them quite well through periods of crisis, post-GFC and on. And then you get a modicum of loan growth coming through, which is what these guys need. The rate environment is good, the balance sheet is solid. All of a sudden on valuations on one-times book or on an earnings basis, seven to eight times earnings, they look super attractive. These, relative to where they were pre-financial crisis, I'm not ever going to say they're going to make up that gap, but they're hugely derated versus the US banks. I think banks in particular are really interesting. An interesting area. Banks and tanks actually are really interesting within Europe right now. Defense spend. From what I was saying earlier on the infrastructure spend and the defense spend, they are the two areas I think are super interesting. Although we've seen rerating in things like defense, quite rightly, the growth profile for these is a completely different level and lead to where it has been in the last 30 or 40 years. Two very interesting areas of the market. But banks in particular haven't re-rated, they are still sitting fairly low, paying very big yields, share buyback. So there's a real total share of the return story there.

Sure. Just to make sure the audience is really clear on this point, when you talk about the global financial crisis, we're talking about 2007, 2008, 2009. And many of these banks still sit below their price back then. This has been not just a lost decade, but almost a lost two decades for some of these institutions. But the regulatory regime has changed. They've recapitalized; they're in a stronger position now. So they start to look attractive. We were talking to Stu Kedwell yesterday, about the steeper yield curve that comes with some growth and with short-term rates coming down, that's very attractive for banks in North America. Same thing applies in Europe.

Absolutely. It's interesting when you go through periods of crises, down the line, how it manifests itself, how companies rebuild and fix themselves. Southern Europe is a really good case in point here. You think of Greece as well, which technically isn't in our universe because it's an emerging market—I presume it’ll become a developed market again soon—but Greek banks, Italian banks, Spanish banks, these banks have really turned the corner. If you look at the yields in the countries themselves on the 10-year yield, Greeks can borrow more cheaply than the US can. If you rewind 15 or 16 years ago, that would seem bonkers given the financial crisis we went through. But that's what happens in periods of crises. It takes a long time to come through the system, but ultimately, you do fix things and they come out. For us, that's providing very solid ground on low valuations to deploy in assets. Financials themselves within Europe, they're 25, 26% of the index. They count, they matter. Off that, banks are about half and you've got diversified financial, I'm not sure if it's insurance, but they're important for Europe to continue performing. I've always thought about Europe versus the US as European banks versus US tech because they're the two dominant sectors. I still think that's the case. But I think that's great for us. From a relative perspective, we should think of that. I think the banks are still in a very good position from a relative basis to continue to perform.

You said banks and tanks. If you think of this military spending that Germany has already announced—and it is quite likely to proliferate all across Europe; Canada as well, for that matter, with some of the pressure coming from the US—are there companies in Europe that are going to directly benefit from this? Traditionally, has it not been more US suppliers who have benefited from any spending that comes out of Europe and other parts of the world? What's different now? Is it the tariffs?

The tariffs, to a degree, but I think there's a realization you need to be self-sufficient. And whether that's on a European perspective or even a national perspective. The Spanish will always have a Spanish contractor they'll go to, and the Germans will have a German contractor. But ultimately, it will be kept within Europe, and the UK would be included within that. So, yeah, you would have seen historically Spain going with the US, but I think the realization and what's going on over the last number of years has really hammered home the need to be self-sufficient and to be able to rearm oneself to a suitable degree to be able to prevent conflicts and so forth going forward. So it is domestic, and there are plenty of European domestic plays starting up in Norway. There are plenty in Germany, France. There are big guys in the UK as well, in Italy and in Spain, every country you look at, there is an angle to play the defense card.

I guess infrastructure would be a big part of this as well, and there's some opportunities there.

Huge amount of opportunities in infrastructure. Again, a lack of spending, so underspending. We talk about rail infrastructure, electrical infrastructure. That's really important from a utilities' perspective. Spain a couple of weeks ago, the whole country went into darkness and Portugal as well, showing you how critical this infrastructure is. But also, it hammers home in terms of the supplier network they've bolted onto Spain, which has been very successful, it's renewable. How fragile that can be in terms of the sun goes in completely over the country. All of a sudden, that supply dynamic completely changes. You need a network that needs to be able to cope with that. As a consequence, you need to be able to remunerate companies that can build these grids and network and can maintain them. Again, I think from an infrastructure perspective, that's vitally important. Then this all nets in and you hopefully get that fiscal multiplier, where it improves productivity and other aspects of industry. I know I'm painting a pretty rosy picture, and I could have sat here many times over the last 15 years talking about low valuations and global businesses, but there does seem to be things changing. There are always political things that can disrupt this within Europe itself, but ultimately, it does certainly feel like a new path of thinking and a new way forward that could be super supportive.

I think that it just shifts people off the extremes. I spend a lot of time traveling and talking to advisors and customers, investors across Canada, and I've said this a few times on the podcast, if I go back eight months, I had investors ask me, why would I invest anywhere else than in the US? That's where everything's happening, like you say, these big tech Goliaths and many other great companies. US dollar is strong. So why would I go anywhere else? And now we're sitting here a few months later, and you can see why. Again, you just needed a trigger to start to get investors all around the world and just get capital flows moving in somewhat of a different direction. A little bit of softness in the US currency and all of a sudden, that opportunity starts to manifest itself. So then you start looking, and what I was excited about talking to you today is, okay, these opportunities are going to be in these different areas, but there are actually companies there that can take advantage of it. And clearly, you're saying, yes.

Yeah, exactly. You've hit on the head of the nail. There's all manner of corporates across Europe that can take advantage of this, but then can also take advantage of things that change elsewhere in the global picture. We could go back three months, and we wouldn't necessarily have seen what was going to happen in Germany. We could have talked about this happening. We could talk about it for some period of time. That trigger, you can never pinpoint it. As a consequence, as an investor, we talk about diversification. Why would I never invest or move away from the US, as you said? But ultimately, you just never know when this is going to happen. The key is, as an investor, you need to be diversified. You need to have that ability to shift assets. As a consequence, that means you always need to have, in my opinion, some exposure to all these asset classes and then be able to dial them up and dial down because you never know when these catalysts are going to manifest themselves. And that does the market, and that's why you get these big moves. And hence, as I said earlier, what's the move we've seen in the DAX just this year has meant on a five-year, four-year, three-year, two-year, one-year period, the DAX start on the S&P on a common currency basis. So we didn't see that coming, but you had to be there to be taking advantage of it.

Yeah, and on the flip side of that, we're not suggesting in any way that you take your US holdings down to zero, but it's the idea of having a little bit everywhere. And then, like you say, what's really important about diversification and having a diversified portfolio to begin with is the idea of dialing up and dialing down. So I might want to be overweight or underweight in a different area for a particular reason. And again, for a number of years, we wouldn't be 100% US, but we might be overweight US, underweight Europe. And then as we've seen things evolve over the last several months, now might be a time where you might want to be a little bit overweight Europe and perhaps dialing down your weight in the US.

It does feel like that to me, given the earnings trajectory, as I said earlier, with Europe potentially catching up from an earnings growth rate, but then starting in a much lower P/E level of 13 or 14 times, relative to your 18, 19 or 20 times in the US. Then you say, well, I'm paying for similar earnings growth on maybe slightly lower-returned businesses, but in essence, I'm paying seven or eight times more for these companies in the US. There are some phenomenal businesses in the US, and the US in aggregate will always be a higher return from a return on capital employed universe than Europe and the rest of the world. There's a consequence, it should be more highly valued, in my opinion. But ultimately, it's all about the gap. The gap or the wedge, it probably shouldn't be that big. That's how we're thinking right now, and that's what we're talking about in all the meetings we're doing while I'm here this week.

Technically, the UK is not part of Europe. Are you seeing the same momentum there, or is the UK at a different spot in terms of the economy and the companies that operate within Europe?

From the economy perspective, actually UK is growing a little bit better than the rest of Europe. So actually, what we're seeing, if you look under the hood in the UK, we're seeing the domestic businesses actually perform quite well. But that's more FTSE 250 in the small- or mid-cap land. Whereas when you look at FTSE itself, there's a lot of big international businesses, not necessarily British businesses either, that sit there. We're seeing it in the mid-cap space. But in a large-cap space, we've got big banks which are doing very well right now. There is a lot of oil, which obviously isn't doing as well, given what the energy prices are doing. The UK is in a better place, I think, domestically, but just the makeup of the FTSE is always slightly different. When you think of FTSE in the UK, it's not quite there. Definitely the economy and the market are two very different things. I touched on energy there, which we haven't really talked about. Another positive for Europe, which has been a drag for a long period of time, is obviously the dependence on energy and importing energy. Obviously, energy costs going down, as we're seeing right now is a big boost. It helps on the inflation picture side, which means the ECB have probably got more room to cut rates further and be more aggressive if need be. But actually, from a cost perspective for your average business, and particularly in the industrial heartlands in Germany, you've got cost improvements coming through as well, which ultimately improve. We've got a growth and a cost improvement potentially coming through or a normalization of cost improvement, which is incrementally positive. It's another angle in which I'm getting myself much more optimistic about the medium-term outlook for Europe as a whole.

Yeah, you get a little bit more bang for your buck. You're going to increase government spending. You're going to spend it in particular areas where energy is a big part of the cost of what you're doing. It makes a lot of sense if energy costs come down, that's going to help. Then on the inflation front, as you say, which is going to help banks, is lower rates at the short end. That's an interesting combination. It sounds like I should just load up the truck, or actually, just load up the boat and sail across and bring all my money there. What's the potential downside? What stall is there? Because, again, at different points in time, we would have talked and seen a spark in Europe, and then it lags again. What are you concerned about?

It would always be geopolitical noise, obviously, which is what we're seeing anyway, but political noise internally. As I was saying before we came on air, yesterday morning, I woke up and the vote for the German Chancellor hadn't gone through, when it normally is a shoo-in, and then three hours later, it got passed. This is always the case in Europe, but you will have noise and macro headlines, which put people off from the other side of the Atlantic in particular. You say, why do I want to be involved in there? There's been a new Italian government once a year since the Second World War. This is going on. The far right gaining votes in Germany. These things are concerning. But ultimately, if this domestic spend comes through, that's the kicker. Then on top of that, you always think, we're investing in companies. We're investing in the companies that can take advantage, be it domestically now or internationally. Take advantage of superior growth and superior returns. We're trying to cut through that noise. I've always shown charts over the years that show the European markets, and they've gone up over 8% compound on your growth since the stocks were in the '90s. You'll see these points in time and your point of debt crisis, migrant crisis, the financial crisis, etc. Ultimately, it doesn't derail in the long term what you see as terrible share of return. I think that will be people's biggest fears, and that's what always put people off about Europe, because you know you're going to get those. That's just part of the course. Our job as investors is to cut through that as we always do and look at what's really impacting the businesses. It isn't necessarily the migrant crisis, or it isn't necessarily, in some cases, energy. It might not necessarily be tariffs. The tariff exposure, we think is relatively low for the majority of Europe. So it's just cutting through that noise and just sticking to the nuts and bolts of what's really driving shares to return earnings over time.

Sure. And this is why when you're sitting as a Canadian and you're looking across investing in Europe and you just see the different way that Europe functions, or anywhere else when you look investing around the world. But what you need to understand and the value that you bring as a professional investor is you're working with these companies, and you know the companies that understand how to work through and work within that system. That's the key. So again, you from Europe might look over at Canada and say, how can this banking system work? How does this work? But the companies here, the really successful companies, understand how to work through not just government challenges, but really all the challenges that are thrown at them. Those businesses, the leadership, the management of those companies, it proves its medal by being able to negotiate things better than their competition, and that's where you want to be.

Exactly. And that's why it's important to engage with businesses, to understand the strategy, the capital allocation, the perspective of the business, how they react, how they think about things from geopolitical tensions to energy, etc. And then it's gaining that trust in them to make sure they can steer their ships. But Europe is always a good case in point. There are many companies that have been around for hundreds and hundreds of years that we talked about before. And they've still got their doors open through two world wars, through all of the things we've seen thrown at us over the last 200 years, and they've been operating successfully and growing. There's experience in doing that within Europe. But you're absolutely right. These corporates can do it, but it's about us getting comfortable with those management teams and those corporates that are able to do it as well. And there are many of those teams in Europe.

And that's a big part of what you do, though, right? We talk to other investment managers, but I know this is a big part of what you do with your team to make sure that you're getting out and speaking to management teams to really understand how they're reacting to all of these changes which seem to be more rapid than ever before.

Exactly. Understanding how they're thinking about it, holding them to account if they do something differently. It's important. This is not our cash that's invested in their company. It's our investors' cash. We want to make sure it's looked after properly. So that's exactly what we do. Every set of results that come out, we check. What's the company saying? Has that changed? What did they say to us last time since we were in a room like this over a table and talking about it? That's exactly what we do. It's understanding what's driving the returns and the asset growth for a business. Because returns on your asset base and growing your asset base is exactly how you grow a business. Any business in any industry, that's how you do it. That's why we do it, so we can understand how those dynamics work and how we anticipate them working over the next 5, 10 years or further.

Well, with the nice weather we have here in Toronto, I know this has been great to do this face-to-face for once. We've done a couple of other videos internally, but this is great to actually have something that's out on YouTube that people will be able to watch and get to see your smiling face. As I say, most people prefer to do the audio version when I'm involved, but you bring enough for people to actually watch this video. One of my highlights when I'm in Europe, when we get to this time of year, over in London, is having a sip of tea outside a tea shop somewhere in London. So hopefully we'll get out this afternoon and I'll show you some of the better tea spots here in downtown Toronto. And we can have a chat over that. A lot of great tea here. It's really evolved. I think you'll really enjoy it.

I'm happy to do my research.

Anyways, Dave, thanks for always saying yes. We'll see you next time we're over in the UK.

Thanks, Dave. Cheers.