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Global Investment Expeditions, Part 2: A Journey Through Scandinavia, Canada and India

Our international analysts recount learnings and insights from recent travels to Scandinavia, Canada, India and other destinations. Hear their first-hand experiences exploring local markets, researching investment prospects and meeting with management teams. (20 min podcast)

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Jess Schmitt (0:04)

Greetings. This is Jessica Schmitt, director of Investment Communications here at Diamond Hill and this is Understanding Edge. Today’s podcast is part-two of our Global Investment Expeditions podcast with guest host and portfolio specialist Matt McLaughlin and Diamond Hill’s international analysts.

In part one, the group took us on a deep dive through Japanese culture and the long-term investment opportunities they’re seeing in the country. If you missed part one and would like to listen, visit our Insights page at

In this part two, we explore additional areas of the world, including the Scandinavian countries of Finland, Norway and Sweden, as well as Canada and India.

As always, stay safe and stay healthy, and I hope you enjoy the second part of our Global Investment Expeditions podcast with Matt McLaughlin and our international analysts.

Matt McLaughlin (1:07)

Great, thanks. Chris, you mentioned you recently got back from a trip to Scandinavia. Can you talk a little bit about some of your takeaways from that trip — the average person may know about companies like Ericsson or maybe even Sandvik up in the Nordics. What were your takeaways from that trip, just generally, and some company-specific things that you noticed while traveling there?

Chris Piel (1:34)

Yeah, it's a good question and we could probably hold a separate podcast on each of these different markets because there were many different unique take-aways from each of these different places. But to set the stage and give sort of a mental model of these three different markets, at least from my perspective as a US-based investor, we can look at to start Norway versus Sweden.

One of the things I did in my time while I was in each of these different places was I met with local analysts there on the ground and had dinner, and things like that, and just got to talk to people who had grown up in these markets. One of the points that an analyst brought up in Norway, in hindsight, really made a lot of sense. It's pretty obvious when you think about it, but it really drove the point home to me in terms of at least comparing Norway to Sweden. So, for example, Norway, a big part of their GDP basically comes from oil and gas. So, in the sixties and seventies, they discovered oil; started a large pension fund, sovereign wealth fund in the nineties, which is now, I think give or take the largest in the world at this point. So, there's a lot of the companies’ GDP economics come from come from oil and gas.

There's also a big salmon farming part of the market there, so really two kinds of major industries and services is a big part of that as well. But you think about it, this oil and gas sovereign wealth fund that's now the largest in the world, the country is able to pull 3% of that a year to provide for social benefits. So, if you spread that over a population of, in Norway, about 5 million people , which to put that in perspective is about the size of South Carolina, that goes a long way, $30 billion plus or so of spending per year that they can apply to these social benefits.

This analyst was telling me that has pluses and minuses: on the one side, the income divide is pretty even in a place like Norway, life's pretty good. But on the other side of that, it stifles innovation a little bit. So, like I mentioned two major industries there. And life's pretty good. There's less of a motivation, if you will, to innovate. If you compare Norway's market to a place like Sweden, which is right next door that doesn't have the oil and gas exposure and doesn't have this safety net with the sovereign wealth fund, you see a much bigger market. In Sweden, the population's about twice the size, but it also has about twice the number of public companies that are over USD 1 billion. Just jumping back real quick, Norway has 50 or so companies above USD 1 billion in market cap. Sweden has about 120 or so, and they have a much broader industry base within Sweden because of that, there's an incentive to, they have similar social benefits, but they have to work a lot harder to achieve those relatively speaking to Norway.

This was just sort of the things that this local analyst had brought up to me that I thought was really interesting and really made a lot of sense as I was reflecting back on that. We could take that as Norway and Sweden, just jumping over quickly to Finland, which was where I was for the first part of the trip. Very interesting market here as well. So, in terms of size, it's also about 5 million people. Again, not a very big market compared to the US, for example. In terms of companies that are mostly investible to Western investors, it's only about 30 companies that are above USD 1 billion market cap.

And what's interesting here after talking to several different companies is there's a large state owner in an investment vehicle in what's called Solidium. This investment vehicle has taken a stake in what they've determined to be the most nationally-important businesses within Finland. And as I mentioned, there's only 30 of them that are above USD 1 billion market cap. And I think this entity owns 12 or 13 of them. But they're really having several different conversations across different management teams here. Their presence is felt in terms of operationally day-to-day, it was easy to glean some examples from management teams, how they have a board seat in most cases because they're taking about a 10% stake. They have influence on the board, but then also there were instances where it came up that they influence M&A decisions or the ability to wind down businesses in some cases.

Those kinds of conversations clearly came up in a couple of different conversations that I had with Finish management teams there. So again, it's something as Western investors, it's not necessarily a bad thing, it's just different to what we're used to here in a place like the United States, which has a huge economy and a very diversified industry base. Here within Finland, 30 companies above USD 1 billion market cap. And most of the biggest ones are influenced by a state owner. And it's just something to be aware of, again, as we're trying to price these businesses effectively and then similarly to where we're finding value in other places, in other parts of the world. So, I thought that was pretty interesting from that perspective. But maybe I'll stop there because there's a lot of different directions to go there.

Matt McLaughlin (7:22)

Sure, yeah. Maybe switch over to Micah. Micah, you mentioned you just got back from a trip to Canada. What were you there to see and what were your thoughts from the trip up there to Calgary?

Micah Martin (7:37)

Yeah, sure, Matt. I periodically email various companies in the energy/metals and mining industry, just seeing if I can come look at a site. If you covered retail, I could easily go look at a grocery store or a clothing retailer, but it's very difficult in metals and mining or oil and gas to go look at the site just on your own. I'm periodically emailing companies, “Hey, can I come check out your assets or business, see a site?” And I had an opportunity to go see Canadian Natural Resources. They have a large oil sands asset in northern Canada called Horizon. And I was able to get a trip there. And so, I flew to Calgary, and then there's a separate flight that goes from Calgary to northern Canada, basically for a full-day trip up there to see and meet people and meet employees and get to see everything from the big, huge trucks that are mining the ore. And then you take it to the different facilities where it gets crushed and processed to make oil and getting to meet the people and talk to them and just learn a little bit more about the culture.

I had never been to an oil sands asset before, so I don't really have a good comparison versus other oil sands assets. But I came away very impressed with how the focus on the culture and the focus on being low cost and efficiency and remaining accountable to each other and being willing to ask the hard questions, which isn't always the case. It was a very positive trip, learning more about Canadian Natural Resources and also the oil sands and how that industry works as well.

Usually when I make a trip, I email companies in the area both before and after trying to get more meetings. And so that was the case this time. I was able to get a meeting with an oil company on Wednesday, and then another oil company on the day I flew into Calgary. And then on Friday morning, the day I flew out to Calgary as well. I really personally enjoy going to visit company headquarters and getting to see executives or IR people on their own turf and be able to ask questions and learn more about the business. It was very productive. It was a quick trip out Wednesday back on Friday night, but it was very productive, good use of time, a good return on investment for our firm as we continue to learn more about the oil industry and energy and the oil sands, in particular.

Matt McLaughlin (10:16)

Great, thanks. Yeah, Chendhore, you mentioned that you’re scheduled to go to India later to this year. Tell us a little about that trip and what you have planned and what you're looking to get from that trip and maybe some of the areas you're focused on.

Chendhore Veerappan (10:30)

Sure. It's a two-fold trip. One is to just understand the country from a macro perspective, but most of my focus is going be on health care. Also, India is all over the news these days. It seems to be after China plus one, after the Ukraine War, India taking over the chairmanship of the G20 this year, its presence in the world economic forums all around the world. It seems like there's a lot of talk about India, and I can somewhat understand the excitement.

For me, the future potential of the country is what really fascinates me. So, it's the fifth largest economy right now, but its per capita GDP is around $2,200 to $2,500. That is not that much higher than sub-Saharan Africa, but yet there seems to be a lot of excitement and for the expectation that by 2040 plus India will be a middle-income country.

And the expectation is the large population, the local market demand, reforms that are being put in place, robust institutions will be driving that kind of growth. So, if India's going be a middle-income country, it probably has to grow four times to five times from today over the next, say couple decades, that's almost 8% to 10% CAGR (compounded annual growth rate) growth or over the next couple decades. So those are the kind of numbers people are penciling in. Now we have to be conscious about ground realities and also be more sensitive to valuations and hype. So that's just how I frame things about India broadly. I want to go there and meet the companies, meet with other investors, and just get updated on what's going on in India.

I lived in India for 12 years. I left in 2001, so I've lived here for 23 years. It's good to go back and do some groundwork. Specifically for health care, it is, again, another fascinating opportunity for investors looking at health care in India. So, if you look at globally, right? The percentage spend of GDP in OECD or developed countries that around 10% to 12%. We, in the US, we spend a lot more money. We spend like close to 18% of GDP on health care. Usually, 10% to 12% is a good proxy. Now, if you compare this to India, India spends 3% of GDP on health care, China spends 6% of GDP on health care, but on a dollar basis, the difference is a lot higher. So, for example, Japan spends about $5,000 a year per capita on health care. The European countries are around that number, somewhere between $4,000 and $7,000. The US, it's around $12,000 per capita. India is only $60 per capita. China is $600 per capita. So, if I just pencil in very roughly India's journey to middle income, and also expect that they go spending from 3% GDP to say 10% to 12% GDP, that is a 12x expansion of the Indian health care market over the next 20 years. Now that's a massive opportunity. It's driven by highly fragmented market. Access and utilization of services and goods is very low. It's an out-of-pocket dependent country. We mentioned about out-of-pocket costs and reimbursement in general, being poor, also ripe with innovation. If that changes from out-of-pocket to a more formalized insurance system, that could also spur innovation and India moving up the value chain.

So that's another opportunity. It also results in higher productivity in the country. I think, and also India might be a young country, but it also has a demographic tailwind, right? It goes from say, I think it's high 20s is the median age or something. In other countries, are 30s and 40s. I think that also is a long-term tailwind for health care in general. My focus is going be on hospitals, and that's an industry that's gone through a huge capex cycle right now. It's about improving efficiency and productivity for these hospitals. I think hospital is an interesting space to invest in. But valuations are stretched. So, one has to do bottom-up work and also be valuation sensitive. The other areas as a team we are familiar with, which is pharma, is largely genetic companies that export to the US and Europe.

We know some of these companies, we also own a genetic company that's part of Novartis in Switzerland. And then the other opportunity is CDMOs or contract development and manufacturing organizations. So as production moves from China to say Vietnam or India. India has a pretty robust infrastructure for the production of these molecules and components that get into medical products. So, it could address the huge domestic need, but just the sheer scale of capacity. It could also be an exporter. The question is, can it move up the value chain?

There are two factors there. One is you can look at India as eventually becoming a Brazil, which is a middle-income country, but has been trapped in the middle-income situation for a long period of time. And if you look at innovation in Brazil, it's not very productive. It's not very high, it's just they still produce branded genetics and they now moving up the value chain. But it's been very slow process. But even if India goes from that to a Brazil-type of situation, the potential for high returns is still there, but if India can become another Japan in the next 20-30 years, then we are off to the races. So, that's how I frame the market. We haven't owned anything in the health care space yet, but the opportunity is just huge.

Matt McLaughlin (16:29)

Sure. Well, thanks for that Chendhore. And maybe now's a good time. We can have a fun question or two that I'll throw out to the group and you guys can chime in with whatever answer you'd like. You've had a lot of the recent travels. What's the best food you've had for the foodies that listen to the podcast?

Chris Piel (16:55)

I can jump in here because I bet I'm guessing that Chendhore is going say the same thing, so we had an opportunity sort of at the end of our meetings at the end of the week to take a trip out to Kyoto, Japan, which is about an hour and a half, almost two hours from Tokyo by bullet train. And out there, I mean, it was just a phenomenal Kobe beef lunch that was in typical Japanese fashion, I would say the presentation was phenomenal. The quality of the meat was phenomenal. A few different courses, seafood included in that, was just really sort of a nice treat and good way to end the trip in my opinion. But it was that by far the best meal I've had yet I think on the road.

Micah Martin (17:50)

I'll go next. Give a couple. Whenever I'm in London, I've only been a few times, but I always go, I'm a simple person at heart, and so a good dish of fish and chips always warms my soul. There's a place called The Golden Hind that is often in a lot of London's best fish and chips places. Every time I go to London, I go there for fish and chips. There's something about it that's just delicious.

And then Tokyo, I would say I used to live in China, so just having some Chinese dumplings. I had those pretty much every morning for breakfast. And then Paris, lots of stuff was good. Lots of classic dishes. It's always fun going out there. One thing I sometimes try to do is go visit publicly traded restaurants that are in those countries that are not in the US. So trying to experience and get some more on-the-ground work. But then you have to mix it up, go to The Golden Hind or something like that in London, even though it's not publicly traded, just because the food's so delicious.

Chendhore Veerappan (18:57)

Yeah, it's kind of funny because the best Thai food I've had was in Odaiba Island outside of Tokyo. The best Indian I've had was on the high speed of London. The best Peruvian I've had was in Amsterdam. So, it boggles my mind that sometimes you go to a country and try to experience their food, but you might run into something else that's fantastic. So that's been a fascinating revelation for me. And you know, like Singapore is the same thing. But I completely agree with Chris when it came to, how many courses was that, Chris? Like four or five or something?

Chris Piel

I believe you're right. Yep.

Chendhore Veerappan

Yeah. But you know, the care and the presentation and just that they strive for perfection and making your experience top-notch. I think that is a uniquely Japanese experience.

Matt McLaughlin (19:57)

Right, that's really fun to think about. And hopefully whoever's listening to this, it's near lunch or dinner. Because, I don’t know about you guys, but I’m hungry after hearing that. So, thank you three for joining me on the podcast. We look forward to hearing more stories in the future. Safe travels and thanks for joining us and sharing your insights.

As of 31 August 2023, Diamond Hill owned shares of Canadian Natural Resources Ltd.

The views expressed are those of Diamond Hill as of August 2023 and are subject to change without notice. These opinions are not intended to be a forecast of future events, a guarantee of future results or investment advice. Investing involves risk, including the possible loss of principal. Past performance is not a guarantee of future results.

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