If Erickson is correct about an impending reversal in global markets, his mutual fund should continue to post strong returns. The Ninety One International Franchise Fund (ZIFIX) he manages beat 84% of funds in its category last year and 88% in 2022, according to Morningstar.

The case for foreign stocks — and how to invest in them

Although international stocks broadly have been a letdown in the last decade-plus, Erickson said investors who avoid them instead of carefully choosing winners are making a mistake.

“There’s significant opportunity to generate attractive returns in the international space, but buying the ex-US market in a blunt way is probably an inefficient way to do that,” Erickson said. “And I think that’s what’s led to a lot of the disappointment from people getting excited and saying, ‘Now is the time for international,’ and then not being rewarded for that perspective.”

Non-US stocks diversify domestic-oriented portfolios, which will position them for success when foreign equities inevitably rebound, Erickson said. There are tons of worthy investments listed overseas, including many that have a massive presence in or exposure to the US, he noted.

“The international universe is broad and deep, and many of the best-performing equities over the last 10 — even 20 — years have come from international markets,” Erickson said.

Erickson added: “There are a lot of international businesses that form essential parts of the fabric of the US economy that are domiciled internationally. And so if you want to get a plenary or a full participation of the US economy, by default, you need to own some international companies.”

In addition to the forthcoming shift toward international stocks, Erickson is preparing for more volatility in markets. The CBOE Volatility Index, or Vix, was unusually low throughout 2023, and some strategists expect that relative normalcy to continue as inflation and interest rates decline. Erickson is in the opposite camp, even though he doesn’t know what will spook investors.

“We believe that the market’s going to experience periods of euphoria and despair,” Erickson said. He added: “The way that we orient our portfolios is that looking through the cycle, if we can put together a portfolio that is going to compound those cash-earning drivers with some consistency and an attractive rate, that over time, the market will reflect in equity prices that progression.”

Erickson’s investing strategy centers around finding quality companies with strong growth in earnings and free cash flow per share. His “anti-fragility” approach allowed his fund to beat its index in bull and bear markets since its inception two and a half years ago.

Although Erickson isn’t making any predictions, he’s carefully eyeing earnings with interest rates set to fall. The next major move for stocks may be determined by how Wall Street reacts to Q4 profits, which are expected to rise 1.3%. If earnings miss that mark, a sharp selloff could ensue.

“The question now turns to the sustainability of growth,” Erickson said. “While you get a bit of multiple support from that rate outlook, the question then becomes: What happens to growth?”

7 investments to make now

True diversification for equity investors means owning companies across sectors that operate in many countries, Erickson said — not just adding exposure to an international stock index.

“If we can find companies with compelling products or services, advantaged market positions that also have diversity in terms of country exposure, then we think that gives us an advantage,” Erickson said.

While Erickson’s four favorite sectors haven’t changed in the last few months, he shared industries within each that he prefers, along with three stocks he likes within them.

Most of the companies he likes have strong intangible assets like well-known brands or valuable patents.

“We focus more on the sectors where intangible assets create differentiation and provide opportunity innovation that adds value to the lives of their customers, be it corporates or consumers,” Erickson said.

Technology stocks still seem like a strong bet, the fund manager said, especially software firms with bankable revenue. Constellation Software (CNSWF) fits this mold since it aggregates vertical software businesses, and it even earned the title of “tech’s Berkshire Hathaway” from The Economist. The Canada-based firm is Erickson’s biggest holding due to its lofty margins and returns on capital, and he said it’s steadily growing through acquisitions.

The consumer discretionary sector also remains one of Erickson’s top choices. Although economic uncertainty may weigh on many companies in this sector, luxury goods makers typically enjoy inelastic demand since they’re status symbols that well-to-do people buy in any environment.

L’Oreal (LRLCY) fits this description since demand for makeup and skincare products should be resilient in any economy. The French firm stands out due to its savvy marketing, top-notch branding, and product innovation, Erickson said. He added that it has a cash-heavy balance sheet despite making huge investments in e-commerce during the pandemic that have fueled its industry-pacing growth.

The other consumer-focused sector, consumer staples, is another of Erickson’s favorite ideas. Companies with name brands and sophisticated distribution networks are vital, he said, which is one reason Nestle (NSRGY) is a large position in his portfolio. Though staples like coffee and pet products aren’t priced like luxury items, they also benefit from all-weather spending. Those who love coffee, pets, or both will buy the goods they need in any economy.

“One thing that we’ve learned about how customers treat their pets is that — even in periods of economic stress — pet owners continue to spend on their pets,” Erickson said. “They’ll cut back on the expenditures for themselves and their families even before they will down trade their dog food or reduce their spend on the family pet.”

Finally, Erickson cited healthcare, specifically pharmaceutical and medical device companies, as a preferred sector. Demand for life-saving or -improving goods or services doesn’t wax or wane, and that defensiveness made it one of Wall Street’s favorite sectors heading into 2024.

While Erickson didn’t share a thesis for any healthcare stocks he owns, three top positions in his international fund fall into that group: eyewear firm EssilorLuxottica (ESLOY), eyecare outfit Alcon (ALC), and Ireland-based clinical research ICON (ICLR).