Despite political and economic volatility, our portfolios show near double-digit growth and trade at just over 10 times earnings.
Unfortunately, the performance of our two International Strategies turned negative for the fourth quarter of 2024 as well as for the year. The quarter was marked by a sharp downturn in U.S. dollar returns of foreign equity markets as not only were most markets down in local currency returns, especially in Europe, but the dollar and the S&P 500 (SP500,SPX) surged because of euphoria surrounding the U.S. election results. In fact, the U.S. Dollar Index (USDOLLAR,DXY) increased by almost 8% this quarter. The Euro Stoxx 50 Index (SX5E), however, declined around 2% in local terms given concern about European politics that plagued stocks once again, particularly in France, just as they did in June. Please see specific Fund commentaries for more performance discussion and specific stock impacts on the various Oakmark International and Global Funds.
As foreign markets continue to lag the performance of the S&P 500, we continue to see the value spread and the valuation between U.S. and non-U.S. equities expand (see Graph 1). Generally, stocks that earn greater returns and have better growing cash flow streams should trade at a premium above those that don't. However, I believe the current discount isn't justified by economic fundamentals but is better explained by momentum-driven moves into a portion of the S&P 500 stocks as well as other areas, such as bitcoin and the U.S. dollar. Many investors, traders and speculators have moved into these narrow places, thus driving prices sharply higher than fundamentals can justify. Meanwhile, the fuel for these aggressive price moves has come from places like U.S. value stocks and foreign markets. Flight from foreign markets is due to market participants being turned off by political volatility and poor economic policy in places ranging from China, the EU and, more recently, the U.K. Our belief is that though many of these places have poor economic and regulatory policies, what really matters for investment opportunity over the long haul are largely intact business fundamentals and valuation. We see this in our portfolios, which overall have projected near double-digit growth, but trade at just over 10 times their earnings (see Table 1).
Many of our clients and shareholders acknowledge the fact that value stocks, especially international ones, have too large of a value gap but cannot see any catalyst for it to close. When mean reversion does occur, it is often difficult to time the event or predict the causes of fundamental rebalancing. And, when the gap is as large as it is today, it can close aggressively. I can list all kinds of catalysts, such as a new German government that would address the growth concerns of Europe's largest economies or China instituting stronger policy prescriptions for its relatively low growth economy, but these are just possibilities. In the meantime, and more importantly, the managements of our invested companies are not sitting still. Rather, they are looking for ways to proactively revalue their companies. In International Small Cap, we have seen a big pick-up in M&A activity (see Table 2) while companies try to take advantage of low share prices. And in our core International Strategy, we have seen numerous steps to increase value, ranging from increased dividends to share buybacks and spinoffs (see Tables 3 and 4).
This is exactly what we expect of our management teams as it shows they take their responsibility seriously to build shareholder value over time. We applaud their actions. Of course, there is selection bias here as our research process seeks businesses and managements that are committed and capable of building shareholder value. We are heartened that so many are responding in a positive fashion while we wait for the more macro catalysts to trigger more aggressive mean reversion in the global markets.
On behalf of my team, I would like to thank you all for your continued confidence and support as we go through this challenging period. I believe, given the quality of the invested businesses and their bargain-basement valuations, that your patience will be rewarded.
Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.