Hello and welcome to the Download. I'm your host, Dave Richardson, and we are joined by someone that I am really upset with. And David Lambert, head of European equities at RBC Global Asset Management, do you know why I'm so upset with you?

I don't, which makes me slightly nervous.

I rely on you for recommendations, particularly around puff pastries filled with delicious meats. And I'm watching CNBC, and they're telling me about a profit warning at Greggs, which is apparently a bakery chain in the UK. And the profit warning is because you're having a heat wave there. And so nobody's buying baked goods, particularly sausage rolls—they're not very good for you anyways, which is why I look like this—and you have never mentioned Greggs sausage rolls to me. I should have heard that from you years ago. Very disappointing.

There is a reason, Dave, and that's because they aren't as good as the Ginger Pig’s. Apparently, their vegan sausage rolls are very good. But it is really interesting what happened to Greggs because it was a summer heatwave, and people stopped eating sausages. Now, I'm going to go straight into a story here because one of our stocks, Unilever, they own the brand Wall’s. Wall’s was formed in the 18th century, and they were a sausage company. What they realized after about 150 years is that they had to lay off staff in the summer because they couldn't sell sausages. They came up with an idea of creating an ice cream to offset that, so they didn't have to lay off staff. In the early 20th century, about 1910, they set up an ice cream company to complement the sausage company. Wall’s sausages still exist, but Wall’s, as an ice cream brand, is owned by Unilever, which is one of the biggest ice cream owners globally. Wall’s ice cream came about because of this very example you just gave, because Greggs experiences a hot summer. It swings around so I just thought I'd bring that story to you.

You said Unilever has been a holding of yours in your portfolio. I'm taking it Greggs has not.

Correct. Greggs hasn't. But actually, from a return profile, Greggs looks quite interesting. But you have to be aware from a valuation standpoint on the cyclicality and the potential cyclicality of businesses, which is why we have a great analytical team behind us looking at these things. We don't own it, but actually, in this past couple of weeks, we've talked about it as a team. We've been looking at it because it's actually a pretty good business. If the valuation comes down and takes into account that potential cyclicality, then actually it could be something that we could see in the portfolios, but a lot more work to be done. But these things, we talk about them as funny stories, but there's always tangents to what we own in the portfolio and what we're actually looking at as potential ideas going forward.

Well, I think to make it up to me, you need to invite me on the company visit and I'll sample some of the products, and I can be that part of the analytics team because I'm pretty good. One of our colleagues in our global team sent me on to a chocolate company meeting for an analyst meeting. That was pretty good.

It's called primary research.

Primary research. Excellent. So I can at least do that. Well, great story to start off. But maybe the best story has been something that we've been talking about for a while, which is at some point the world is going to recognize the value in European markets. At some point, Europe is going to start to deliver performance at or maybe even, God forbid, above US stock performance. And lo and behold, that's the first half of 2025. What do you think was the trigger and what's happening over there that makes it such an exciting market for capital to flow?

The main trigger we saw, and definitely through the first three months of 2025, was particularly what came out of Germany and the infrastructure and fiscal spend that they'd committed to, and they've carried on committed to. In fact, they've even committed to spending 27 billion second half of this year. The five hundred billion of infrastructure spend that Germany was talking about has already gone through government and been passed into legislation. We can see it, we can touch it almost. I think that was a real big thing because the thing that Europe has always struggled with as a domestic play has been that growth angle. Now, if we think about defense spend, infrastructure spend, stimulus that we haven't seen for a long time, for decades, is now coming to pass. When you think about how you build your models and you think about, what do I put in for that G for growth into the calculations going forward? Well, instead of it being 0-1%, then maybe it's 1-2% or even higher. That incremental upgrade is actually very significant, in terms of a valuation perspective, because things that grow faster at higher returns should be valued higher, but also from an earnings growth perspective going forward. You've got that double kicker. What we saw the first half of the year was earnings, it's valuations from a very low level start to rerate slightly. Not getting anywhere near where the US is. But ultimately, the second leg is, so probably if we look at valuations now, they're at median levels what we've seen over the last 20 years. Now, obviously, that's from a low growth era and from a low return era. One would say in a long-term basis, maybe they're artificially low. Actually, you could see some closure with respect to the US. But on top of that, the actual growth perspective looking forward actually looks a lot rosier because in the past, we've relied a lot on earnings growth for European corporates coming from international markets, from North America, from emerging markets. I always say this, I think of Europe as 40% Europe from revenue exposure, 30% EM, 30% US. That 40% of Europe hadn't been doing a lot. Now, if we look forward, that 40% Europe exposure might be doing a little bit more than it used to. From a valuation perspective, that could mean higher valuations for Europe, but it definitely means higher earnings growth. If we get a double kicker of higher valuations and higher earnings growth, it could mean that Europe performs very nicely. That's definitely what we saw the first half of the year, rerating. Earnings growth itself was on par with the US, for instance. But you see then what happens is if you got an asset class on a very low valuation and you only have to start to close that very slightly and you see a huge amount of catch-up from a performance perspective, a huge flow perspective. We've seen lots of flows into European equities and international markets this first half of the year. It's very powerful when you get this virtuous cycle of things happening. It's been a very good start of the year. We've tracked sideways, really, for the last 8 to 12 weeks or so. But we've moved a long way very quickly. Sometimes you need digestion within a market to get a speed of gain and base and then set going forward to rally off a lower earnings space or a lower earnings space with lowered expectations. The outlook is still fairly rosy, I would say, for Europe and very differentiated to what we've seen over the last 20 odd years.

When you look at the benchmark you would use to evaluate what the multiple is on earnings, what would that benchmark be and what is that running? The US is running at about 22- or 23-times earnings right now. Where would Europe be sitting?

Europe right now, going into the turn of the year, we were looking at 12-times earnings, but now we're at about 14-times earnings, which is a re-rating, but nothing like the 22 times. If you think of an asset, even if you think of a stock, something that can grow at a decent rate on high returns, 14 times is a fairly low multiple. So 14 times, which is in line with what we've seen over the last 20 years, but one would argue, over the last 20 years, we've been through bank crises, migrant crisis, a lot of things in Europe. Maybe we're just coming out the other side with a stronger banking sector, with a higher growth profile, with more fiscal stimulus coming in. So one could argue that that rerating could go further. So we're back to normalized levels, but still far behind on a relative basis to the US.

Yeah. And that's just something, which is a great lesson for everyone listening to the podcast. We've had David on several times over the years. We usually catch up with him about once a quarter. And we have just been talking about the underperformance of Europe for a number of years, but at the same time talking about that valuation point. So the story that David is telling is, look, we've got similar earnings growth or at least earnings growth that's in that neighborhood, and then we've got the potential for fiscal spending, whereas in the US, debt is tough and debt levels are high. So why would I pay somebody $23 for a dollar of earnings when I can buy something for 14 times? And you start to just say, well, that gap, if the growth in the US and the potential in the US is that much higher, well then, yeah, maybe I will pay more for it. But all of a sudden you get that shift and that 14 times—or 12, at the start of the year—becomes really interesting. You just got to say, hey, why would I pay more when I can get something pretty good at that discount?

Exactly. We're not talking about shifting all of that stuff in a 22-times market to Europe. But it just goes to show, and we've always talked about this, diversification in an asset class that moves differently. There are correlations, but there are different movements within the market. At a cheaper valuation, you see in periods of a cycle, and we think there'll be more opportunities in this cycle, given what we've said with the fiscal stimulus, it pays to own these assets to diversify yourself and protect yourself from downdrafts, from high valuation parts of the market, etc. For us, it's a very important part of a global makeup of asset classes and geographies.

Absolutely. The current CEO, Dan Mitchell from Dagmara's team is over here this week, and we were chatting and talking about currency hedging and the way currencies are moving. The currency team can articulate it much better than me, but talking about a weak US dollar for longer. As an asset class, Europe fits the bill in terms of what's happening on an idiosyncratic level, but also from a currency level. Clearly then, as a portfolio manager, you have to look at the exposures of exporters to stronger currencies and what that does to the earnings. But that's part of our job. Do they have hedging in place? Are they offsetting costs with revenues? That's part and parcel of the danger of what we do. All those things. But absolutely, the stronger currency, something we haven't seen for a considerable period of time, euro, sterling, also the Swiss franc. The Swiss franc has been super strong, and Switzerland is a decent chunk of Europe as well.

Yeah. What you'll typically see, for Canadian investors, is when the US dollar gets weak, we pick up ground with our Canadian dollar, but the Canadian dollar tends to be linked more closely to the US dollar. Then you look at some of these other currencies like the euro, like the pound, like the Swiss franc, they tend to get a little bit more lift relative to the Canadian dollar. That's where currency comes into play. Currency over the long term is almost a zero-sum game, but in the near term it can have a significant impact on the returns that you're getting when you're investing money outside of Canada as a Canadian investor.

Absolutely. But I think the one thing to highlight is that when we look at our products from a benchmark perspective, the currency exposure is hedged back to the benchmark. For instance, say we're underweight Switzerland, we're underweight Swiss stocks, we won't be underweight the Swiss franc, so we're not taking a view on the currency. That's quite important to make clear you're not taking those exposures. It's all benchmark.

Very good. David, let's talk about Europe and the tariffs. The tariffs have popped up again this week. Well, they've been around every week, but it seems to have accelerated this week with some letters going out and some additional tariffs on copper and some other things. How have European markets performed through the different levels of scare or the different intensity of the tariff scare since the Trump inauguration? Where do you think we sit now with tariffs?

I think the degree of volatility we see in the markets has subsided. The markets have become much more resistant to the noise. Now, clearly today, as we talk, we've had a letter go out to Brazil last night, and so anything with Brazilian exposure is a little bit wobblier today. But ultimately, it makes it very hard for companies to plan for their CapEx and to plan for their business going forward. That's not a good thing, but that's planning for their businesses in the US in essence. But as I say, the market has become more resilient. I would think of this as your risk premium goes up slightly because there's that degree of known unknowns that is going to persist, guaranteed for the next 18 months. Whether it's hot air or whether it's real and comes to pass—and not a lot has come to pass at the moment. When we draw it back to the companies themselves and how does this really impact them, it really is fairly small from a revenue exposure, from a European equity perspective, in terms of things that are made outside the US and sold in. A lot of these global businesses that we're investing having their manufacturing already in the US, that's very little. You can look at areas of luxury and spirits, which are made outside and then shipped in. But ultimately, when you look at the actual impact of tariffs, it's fairly minimal. The real impact is on that risk premium, which affects the whole of the globe and all global equity markets. But as I say, the volatility to those headlines has dampened considerably over the last six months or so.

Not overly surprising that the markets get more comfortable with it. When you're out talking to companies—because we did touch on the idea that you do go out and you do that primary research, along with all the technical and fundamental and all the analytics that you follow—are you seeing any differences in the way management teams are managing through this tariff uncertainty? And does it trigger you to take a closer look at some of these companies that you're really impressed with, the way they're thinking about it?

Yeah, well, I think there's a couple of things. One, these global companies have this ability to allocate capital to where they have more certainty, to where they have high returns or they see growth opportunities. Actually, a lot of European companies, probably one of the most globally exposed market in the world from a revenue perspective, have that ability. Actually, they can sidestep. I think that's a real advantage. Now, I expected a lot of companies, going into the most recent results, to rain back on their guidance and use that excuse of uncertainty as a reason to give you less clarity on how they see their business. Actually, we haven't seen as much of that as we thought, which is a positive because it means companies are still very comfortable in how they're seeing things, how they see the trajectory of their budgeting for revenues, for costs, etc. It's a couple of things. I've been pleasantly surprised how resilient companies have been. Secondly, the companies we invest in typically have that ability to ship capital away if things get bad. But over the last 12 months or so, because of what we've been seeing in Europe, we've shifted the portfolios. We still have lots of great global businesses, but our exposure to some more domestic businesses has increased slightly. We think about utilities, we think about banks, we've talked about, we think about telecoms, typically purely domestic businesses. Our exposures have drifted up there relative to where they've been over the last 10, even 15 years.

Those are the areas, David, or what areas have been leading the way in Europe? Then as you start to look in the second half of the year, does that leadership continue? Does everything remain in place to hold that leadership? Or do we start to see things shifting around a little bit?

Yeah, I think that's an interesting question. I think the bricks and mortar are in place for banks and defense companies to still continue to lead. That's what's been leading this first half of the year. Defense, for obvious reasons. Now, there's a differential here. Defense now is rerated quite considerably, but the growth outlook or the profile going forward, there's more certainty. There's definitely more of a demand. Actually, it's an interesting space. I expect it will still be leading, but not to the extent it has been so far. We've seen the majority of the rerating. As we stand, we have a decent position in aerospace and defense, and I'm quite happy with that. Banks is the other area that's led, and we've talked about banks for a long time on these podcasts. It's really interesting what's happening with banks now. Banks have sold out their balance sheet on low valuations, tough regulations, and have performed very well, started giving cash back to shareholders, and have performed very well and have led. This week we’ve hit nine-year relative highs in Europe, so they've been super strong. But I was telling one of our internal meetings earlier this week that what we've actually seen in more recent statistics is loan growth within Europe, which has been zero to negative since the financial crisis, was at 2% year over year at the last reading. Not a huge number, but it's pretty significant. If you've got banks now operating in a region which is now seeing loan growth, where we do our equations and we think about valuations, there's a value to that G, there's a value to growth. You've got a second leg to why banks could continue to perform well from tough regulatory position, but that's fine. They've dealt with that from good balance sheets and low valuation. We'd expect banks to continue to do very well. Defense will be fine, but the majority of the heavy lifting with the rerating has been done. The interesting aspect, it's been a very pro-cyclical market. So defense has lagged, healthcare has been terrible, staples have lagged. But there are some great businesses in these areas. Now, while the operational momentum and the price remains sluggish, we'd be reluctant to move in. But we are seeing valuation opportunities come up in healthcare and staples in particular. I think as we look at it, going into the second half of the year, we'd expect more of the same, but we're paying more attention to what's going on from an estimate perspective in these defensive names, because we're seeing valuations looking fairly low in energy, health care, staples, as traditional defensive areas. Utilities, which is normally defensive, has actually been pretty robust. We still quite like utilities from that electrification thematic that's going on. But yeah, more of the same. But as fund managers, you always have to be on your toes and looking for what's moving and why, and what's driving. We're seeing opportunities arise in some of the quality areas of the market and some of the defensive areas of the market. Because actually the other aspect of what's been moving in Europe, because Europe has been in a recovery phase, quality names have actually lagged. It's been the high-risk, low-quality names that have performed very well, which is a tough market for us because we want to be invested in companies for a long period of time. We want to be in great businesses. We're starting to see quality stabilized. That's what we're keeping an eye on. We're not forecasting a shift yet, but through the second half of the year, that's what we've got our eye on in terms of good valuation opportunities to take advantage of. These could be 5- to 10-year opportunities we could be buying into.

I read a couple of analyst reports from other firms this morning, both focused on that same idea that it's been surprising how quality has lagged in a lot of different places. It's interesting that you're saying that what you're seeing, particularly in Europe, is some of these quality names that have very good shareholder value in terms of returning capital to shareholders, share buyback, those sorts of things have lagged. I know that that's right in your bailiwick.

Yeah, absolutely. That's the investment philosophy, almost in a nutshell, quality names that can compound themselves. We went through a period post-financial crisis where we had zero interest rates, where that quality trade was a one-way street. Valuation is much more important in a more normalized interest rate environment. That's what we've seen in the market. But typically in any market recovery, when you come off the bottom, that's what leads a rally. It's that low quality, it's the high indebtedness. It's those names you wouldn't want to be owning for a long time. But as a portfolio manager, we have to manage that. Ultimately, we’re looking for these opportunities now and we can see them. We're just waiting for the right time when we see the positive momentum come about to invest in these for the longer term.

Yeah. Then the bank one is very interesting. I think the last time we were on, we were talking about how much European banks have lagged since the global financial crisis. And when I'm talking about the global financial, we're going back to when David and I were young men. That was 2007, 2008, 2009. And you're just seeing those banks get back to those values and move through that. And then, as you say, 2% loan growth, it doesn't sound particularly exciting, for Canadian banking sense in particular, but when you go from zero or negative to plus two, wow, that's a move in the right direction. And that's when you start to see these stocks move, and if there's potential for more, that's what you're going to be able to tap into. Certainly, where interest rates are sitting and the way the yield curve looks, it's positive for banks.

That's right. The thing we have to remember as well, Dave, is that when we think European equity markets, unlike US equity markets, financials are a big chunk. Financials and banks are important. I'm not saying they're not important in the US, but tech is far more important in the US. When we think about US versus Europe, we always think what’s holding the European flag is the financials. It's important that the financials, they have been behaving very well and continue to behave very well, and we expect that to continue.

Yeah, we're well aware of that and that concentration in financials as Canadians when we look at the Canadian market. David, what are the big risks you'd be looking at over the horizon that could upset the positive momentum, at least, that you're seeing in Europe and the UK?

I think the biggest risks are the reversal of the things that have been working well. If there's a delay in the fiscal spend, which, as I said at the beginning of the chat here, we've seen Germany already commit 27 of the 500 billion to the second half of this year. They've talked the talk, now they're walking the walk. That's good. But any dampening of that wouldn't be taken well. Obviously, defense spend, we want to see that continue, and that is going to continue. I guess we might see some peace dividends, and I'd love to see the peace dividend come through just from a human perspective. But ultimately, that would disrupt some of the trades we've seen in the market. But we're not overly exposed to those names. But I guess the biggest risk out there is what Trump does and what the decisions ultimately are on tariffs and trade and relationships between the US and Europe, China and the US and China and Europe, because they're very important. China is very important for Europe. I thought at the beginning of the year, China would be pushed more into Europe's arms with respect to being more closely tied. I'm not sure if that's going to happen now, but they're an important thing. Any blow up, and particularly with the trade agreement with the EU and the US, I think that's the most important thing. Europe's trying to tow a hard line with Trump. We see how that manifests itself. But ultimately, the way I would look at it, I wouldn't be too worried from a stock perspective. It's more from a risk premium perspective if that's going to impact things. That's how I think about it. Other than that, my biggest worry would probably be more about the US. Companies exposed to the US. Do we see deterioration? A slow down? How do we see chances of recession, delinquencies? We'd be looking at things like that, but we're always doing that. That'd be the things on the top of my mind right there.

Yes, constantly paranoid and looking for risks. I think that is just the life of a portfolio manager. One of the things I think that a professional portfolio manager tends to focus on and manage better than a typical investor, that recognition of risk and awareness of how to manage through different forms of risk within a portfolio.

I think so. We've had the experience, we've been through many cycles, just putting that to use. That hamster wheel of work that we go through. Whenever we present, we try to articulate—it sounds mundane, but we're constantly going over everything we've looked at and checking we're right or checking our assumptions are relatively correct, and then checking them again constantly and having reminders. That's the day-to-day job.

Well, I'm going to give you a tip. I think you should be looking at consumer stocks in Central Europe. My daughter is traveling through Germany, Austria, Slovenia, and Croatia. She has her parents' credit card, and we're already seeing the hits on the card. So there's people over there spending in that part of the world. So if you don't have exposure to that, you should probably get a piece of it. It's just always great to see you, David. And great to see Europe winning. For listeners, again, subscribe to the podcast, wherever you listen to podcasts, follow us on YouTube, give us a nice review so that we move up the old algorithm and more people get to hear from David and the other guests that we have. Because if you'd been listening, you would have known that Europe was a real opportunity. It's always nice when you're talking to investors and you say, hey, I think there's an opportunity here, and then it plays out. I think that feels better than anything.

It does. But these things go both ways.

Absolutely. But, ultimately, I guess what we're saying is we love it when Canadian investors are doing well wherever they're investing, and we're glad that Europe is playing out nicely as, again, a nice diversification play, nice currency play. An interesting way to add to your portfolio.

That's completely it. As we've said all along Dave, diversification, a decent asset class which has grown in almost double-digit % compound. It needs to be part of the portfolio at some level.

Great. Well, David, thanks again. We'll catch up with you in the fall, probably. But thanks for always being there for us and enjoy the rest of your summer with the family.

You too. Thanks, Dave.