Top fund manager David Herro says that, while stocks jumped far more than most expected they would in 2013, they still should have room to run going forward.
“Despite the strong past performance of global equities, I believe there is still value in global equity markets,” Herro writes in his fourth-quarter letter to Oakmark shareholders. “Certainly, stocks are not selling at the incredible bargains they were in early 2009 or even early 2012, but with global economic growth appearing to be poised to accelerate, and with stock valuations that are still attractive, I believe there are reasons to be confident that global equities will continue to be an attractive asset class.”
Herro, whose funds profited greatly from overweight positions in Japanese firms last year, says the big gains seen for Japanese stocks has led to him paring back on those positions. “Since the low of the Topix in 2012, the market climbed around 80%!” he says. “As a result of the extremely strong uplift in prices, our holdings became less undervalued and caused us to trim some of our positions. Given that prices rose faster than corporate value creation, by the end of 2013, we were actually well underweight in the Japanese equity market.”
Herro talks more about the corporate changes going on in Japan, and what he thinks is needed for the country to continue its progress. “I believe that in order for the economic recovery to endure, the Japanese government needs to implement real structural reform,” he says. “This means that Japan’s government must complete at least three steps: take away protections from specific industries, like agriculture; remove impediments to productivity and workforce growth; and take away the barriers to mergers and acquisitions within corporate Japan.”
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