Implications of the recent call for French elections

June 27, 2024

With four billion people heading to the polls in 2024, the most ever, elections are top of mind for investors. Case in point, the recent European Parliamentary elections led French president Emmanuel Macron to dissolve the lower house of Parliament and call for elections on June 30th. Immediately thereafter, the euro dropped, French bond prices rose and the France CAC 40 Index fell 8% in a week.

We find that the short-term price volatility from these events, in most cases, has little or nothing to do with the intrinsic value of the businesses in which we invest. It is important to note that our view and standard financial theory state that intrinsic value is a function of the cash flow a business generates—current and future—discounted to the present. For example, a company like BNP Paribas, France’s leading bank, declined 15% in the first two weeks of June. However, it’s hard to make a case that BNP Paribas is 15% less valuable if the leading party in France changes from Macron’s centrist party to Le Pen’s right of center party.

I would assert that, as often is the case, the underlying intrinsic value of the corresponding businesses did not change as drastically as the market price. In fact, this is usually the case as fearful traders and investors often sell in a knee-jerk reaction in response to any geopolitical disturbance. We believe that for real investors, this provides an opportunity. Our process is to first try to measure the true impact these events may have, if any, on the intrinsic value of the businesses we own and then respond in a way that takes advantage of the market’s short-term fears. Not only do we seek to capitalize on short-term price dislocations, but so do the management teams we invest alongside. Many European banks, like BNP, have active share repurchase programs. When share prices trend lower, BNP and others are able to buy back shares at lower valuations, which can be very value accretive. Again I stress the point we often make: Volatility is opportunity!

We believe that markets and the economy will adjust to this new reality, as it did during the Greek crisis and Brexit. Though some negative side effects could result from changes in government policy, there may also be more than a few positives. For instance, the weaker euro should aid currency-sensitive sectors such as exporters and tourism.

Geopolitical events have and always will be part of the investing climate. However, despite this, what fundamentally impacts value is not macro events, but factors that impact a company’s ability to generate cash and create value for its owners over the long term. As value investors, this is what we study, analyze and price.

The holdings mentioned comprise the following percentages of total net assets as of 03/31/2024:

SecurityOakmark International Fund
BNP Paribas4.0%

Portfolio holdings are not intended as recommendations of individual stocks and are subject to change. The Funds disclaim any obligation to advise shareholders of such changes. Information about portfolio holdings does not represent a recommendation or an endorsement to Fund shareholders or other members of the public to buy or sell any security contained in the Funds’ portfolios. Portfolio holdings are current to the date listed but are subject to change any time. There are no assurances that the securities will remain in the Funds’ portfolios after the date listed or that the securities that were previously sold may not be repurchased.

Access the full list of holdings for the Oakmark International Fund here.

The information, data, analyses, and opinions presented herein (including current investment themes, the portfolio managers’ research and investment process, and portfolio characteristics) are for informational purposes only and represent the investments and views of the portfolio managers and Harris Associates L.P. as of the date written and are subject to change and may change based on market and other conditions and without notice. This content is not a recommendation of or an offer to buy or sell a security and is not warranted to be correct, complete or accurate.

Certain comments herein are based on current expectations and are considered “forward-looking statements”. These forward looking statements reflect assumptions and analyses made by the portfolio managers and Harris Associates L.P. based on their experience and perception of historical trends, current conditions, expected future developments, and other factors they believe are relevant. Actual future results are subject to a number of investment and other risks and may prove to be different from expectations. Readers are cautioned not to place undue reliance on the forward-looking statements.

The Oakmark International Fund’s portfolio tends to be invested in a relatively small number of stocks. As a result, the appreciation or depreciation of any one security held by the Fund will have a greater impact on the Fund’s net asset value than it would if the Fund invested in a larger number of securities. Although that strategy has the potential to generate attractive returns over time, it also increases the Fund’s volatility.

Investing in foreign securities presents risks that in some ways may be greater than U.S. investments. Those risks include: currency fluctuation; different regulation, accounting standards, trading practices and levels of available information; generally higher transaction costs; and political risks.

Investing in value stocks presents the risk that value stocks may fall out of favor with investors and underperform growth stocks during given periods.