global stock diversification and potential
Global equities make a strong argument for diversification, particularly for Australian investors who might have a significant focus on local stocks. Julian McManus, co-manager of the Janus Henderson Overseas Fund, states that international markets present a distinct chance to guard against risks inherent to the U.S. or Australia. For example, the impending commercial real estate refinancing challenge in the U.S. is a risk that foreign equities can help alleviate.
McManus points out that international stocks grant access to firms with unique benefits, many of which are trading at appealing valuations. These businesses, frequently disregarded by the general market, can yield above-average returns with below-average risks. This is especially pertinent for Australian investors aiming to move away from sectors like mining and banking, which heavily influence the local landscape.
McManus identifies prospects worldwide, from Indian and Japanese banking institutions to firms engaged in the semiconductor supply chain. These areas are not only underrepresented in the Australian landscape but also present growth opportunities that are hard to locate domestically. Furthermore, the defense sector, traditionally undervalued in the aftermath of the Cold War era, is now set for a revival. With worldwide defense expenditure increasing, this sector offers a rare blend of enhancing fundamentals and low valuations.
Nonetheless, McManus approaches certain territories and sectors with caution. He refrains from investing in regions where governance issues may lead to irreversible capital loss, such as Russia and some emerging markets like Argentina, Mexico, and Brazil, depending on the political situation. For Australian investors, this serves as a reminder to exercise discretion when exploring foreign markets. Additionally, McManus avoids tobacco stocks, citing the detrimental health effects linked to tobacco use as a primary reason for eschewing these investments.
leading stock selections from McManus
McManus’ stock selections embody his overarching investment strategy, prioritizing firms with solid fundamentals that are undervalued in the market. One of his top selections is Taiwan Semiconductor (TSM), a vital player in the global technology ecosystem. TSMC stands as the world’s largest and most advanced semiconductor foundry, manufacturing state-of-the-art chips for major companies such as Nvidia, Apple, and Amazon Web Services. McManus emphasizes that TSMC’s scale and technological superiority have established a formidable barrier, leaving rivals like Intel and Samsung struggling to keep up. Despite its leading position, TSMC is trading at just 16 times forward earnings, which contrasts sharply with Apple’s 30 times and Nvidia’s 40 times. This presents a chance for Australian investors to access the high-growth semiconductor arena, which is underrepresented locally.
Another notable pick is BAE Systems (BAESY), Europe’s foremost defense contractor. Headquartered in the U.K., BAE has been undervalued for years due to stagnant defense allocations post-Cold War. However, McManus notes that geopolitical strains, including Russia’s invasion of Ukraine and the U.S. realignment towards the Pacific, have triggered a substantial rise in global defense spending. BAE is poised to capitalize on this transition, anticipating years of above-average growth and increasing profit margins. For Australian investors, BAE presents a gateway to the global defense industry, which is experiencing renewed enthusiasm as nations boost military expenditures in light of evolving security threats.
Lastly, McManus brings attention to HDFC Bank (HDB), one of India’s premier financial institutions. HDFC is well-regarded for its effective management and solid growth outlook, with both return on equity and lending expansion expected to sustain high teens. The bank is currently merging with its housing finance subsidiary, HDFC Corp, which has momentarily unsettled investor sentiment due to less favorable quarterly results. Nevertheless, McManus views this as a buying opportunity, as the stock trades at a reasonable 18 times earnings. For Australian investors seeking diversification into emerging markets, HDFC offers a way to engage with India’s swiftly expanding financial sector, poised for long-term growth as the country’s middle class continues to flourish.
