European Valuation Arbitrage

Scott Galloway sees a major investment opportunity in European markets as capital flows are about to reverse after 15 years of unprecedented inflows to the US.

Key Investment Thesis:

• Capital flows into the US over the last 15 years are about to reverse
• Started selling US stocks in Q4 of last year
• Regression to the mean is a powerful force - economic cycles usually last 8 years, but we've been on a 14-15 year run

Why Europe:

• European market is currently undervalued - "when something's been left for dead"
• Good companies trading at single-digit PE ratios
• Compared to US companies like Apple trading at PE of 34-36 despite only 1% growth
• US market likely to experience "enormous transition" with "massive multiple contraction" from 26 to high teens or lower

European Defense Spending Catalyst:

• EU has concluded it can no longer rely on US for military support
• Planning to increase defense spending from 1-1.9% of GDP to 3%
• Represents ~$200 billion additional annual spending on defense
• This unexpected spending will be stimulative and create technology spillover effects

Investment Approach:

• Planning to be "almost entirely out of the US market within three or four months"
• Invested in Vertical Aerospace (European company)
• Invested in Atlanta Partners fund that finds small and mid-cap special situations in Latin America and Europe
• Following Ray Dalio's principle of finding 12 positive income streams that aren't correlated
• Also invested in two Israeli companies

Challenge:

• True diversification is harder now because institutional investors have made most assets somewhat correlated
• When institutions need capital, they sell everything, creating interconnection