David Herro co-manages Oakmark's International and International
Small Cap mutual funds.
Europe did well in 2013. What will happen in 2014?
The past year was a relief rally--Europe didn't fall apart. In
2014, the rally will move to "Europe may start to grow." The region
is on the road to economic recovery. And the stocks are relative
bargains. Europe has a lot of strong, world-class
companies--they're growing and making money, but the stocks haven't
recovered as much as U.S. shares have since the markets hit bottom
Any particular bright spots?
We like European banks and firms that sell essential consumer
products and luxury goods. Credit Suisse (symbol
) is a combination asset-management firm and investment bank. It's
a good-quality business with a stable income stream. Daimler (
) is a leading truck company and the maker of Mercedes-Benz autos.
Mercedes has generated record sales for the past two years, despite
weak demand for cars in Europe. Daimler has a strong balance sheet
and a dividend yield of 4%. One of our favorite businesses is
,), the U.K.-based spirits business. We've owned the stock for more
than ten years. It's a solid business with iconic brands, such as
Johnnie Walker. And it spends money in smart ways, from buying
other strong beverage brands to raising dividends to buying back
What about Japan?
The market is up 80% from its bottom in mid 2012 (in
local-currency terms). The rally will continue if the prime
minister follows through on his plan for economic and corporate
reform. If that doesn't happen, we'll need continued earnings
growth from Japanese companies and a weaker yen to boost exports. I
expect subdued earnings growth in 2014 unless the yen weakens
further. We've trimmed some holdings purely because of prices going
up, but we're always looking for opportunities. When the market
dips, we have added to some of our holdings, including Daiwa
), Canon (
) and Olympus (
Emerging markets were basically flat in 2013. Will they come
Perhaps emerging markets have bottomed, but earnings growth has
yet to pick up. And the stocks are still expensive compared with
those in the U.S. and Europe. Earnings would have to grow, or
prices would have to drop 10% to 15%, to change our view. Many of
these countries have economic issues, Brazil and India in