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Coast Capital CIO on Euro markets, gold and problem with ESG investing

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Coast Capital CIO and founding partner James Rasteh joins Yahoo Finance Live to discuss why he is bullish on European equities, his outlook for gold mining stocks, and what he considers to be the failing state of the ESG industry.

Video Transcript

JULIE HYMAN: And as we look at European stocks versus the US, a lot of investors are also looking at the relative valuations. One of them is James Rasteh, he is Coast Capital CIO and founding partner. James, thank you for being here. So as you are trying to figure out where to deploy capital and you're looking at the relative valuations, I know Europe is looking attractive to you and the UK, specifically. Talk us through your thinking here.

JAMES RASTEH: Yeah, really nice to be with you. Good morning, good afternoon. And look, depending on the part of Europe that you look at, valuations on average on the continent, including the UK, are at half of where they are in the US, right? So DJ Euro STOXX 600 is trading at 14 times earnings, the S&P, 28, 29. And so I find many companies in Europe that are in exactly the same line of business as their North American counterparts.

They might be leading their North American counterparts. They have the same geographic footprint, very comparable or superior margins. But they traded notable discounts simply because they happen to be located in the UK. And that is as obvious in arbitrage to us as can be found. The UK is particularly attractive as a market because it's a very friendly jurisdiction for minority investors. But it also is one of the deepest and broadest markets in the entire world, and certainly in Europe.

So there are many tech companies, there are many health care companies, consumer goods companies, retail, real estate, whatever kind of industry you want, you will find that in the UK. Same cannot be said for almost any other market across Europe.

MYLES UDLAND: Well, James, why do you think that that discount has persisted with the spread between US-- the valuation that's assigned to US-based companies and their European counterparts? Because it's been persistent now, really, through the last cycle. Where do you and how and why do you see that reversing maybe as we clearly enter a new economic cycle coming out of COVID?

JAMES RASTEH: Look, you're absolutely right. It's been the case over the last cycle. But I've been investing for almost 25 years in Europe. I want to say that 90% of the time, it happens to be the case. But there are times at which the valuation discrepancies get to an extreme. And this is the most extreme of those times.

So over the past several centuries, we've never had this kind of valuation discrepancy. Why that is, I think that there are-- look, at the end of the day, I think that Europe is just from a financial markets and participants perspective is less exciting and excitable part of the world. People attribute all kinds of structural issues with Europe being a sustainable [? exercise ?] going forward or not, which I think is really a topic that's worthy of discussion.

But at the end of the day, look, the past-- we know how the UK is going to operate going forward. Brexit is now behind the UK, probably going to be an extraordinarily difficult setback for especially domestically oriented companies more than expected and for longer than expected. But at the end of the day, companies that have the same footprint as their US counterparts are in exactly the same spot. And so discounts just don't make sense.

BRIAN SOZZI: James, switching gears a bit here. One thing a lot of money managers and a lot of folks on the Street are excited about is ESG investing. I can't tell you how many pitches we get on these type of stocks and this type of theses we've gotten over the past year. But you say the ESG investment industry is broken. Why is that?

JAMES RASTEH: Well, you know, look, I think-- I actually personally really care about using whatever extraordinarily limited impact and influence and platform I have to make sure the companies that I invest in or interact with are better managed from an environmental or social perspective. So we have a history of, for example, investing in Petrobras and really, really forcefully getting them to back off a planned pipeline that they were looking to build across the Amazon. You know, we have done a lot of proactive work from an ESG perspective.

And when I look at ESG funds, one of the best known of which is the Al Gore-led, I think Evolution or whatever it's called, it's based in the UK. In 2016, their largest position was in Facebook, OK? They think that Facebook is in ESG, where the investment, this is off the top of my head, even though Facebook, I would argue, has been one of the most destructive companies in terms of business models.

In fact, in terms of actual impact on democracy that it's had. It's like one of the worst companies in the world I think in ethos, in culture, and an impact on society. And that's what these companies are investing into, and they're passively investing. And I think that the whole thing is a sham and a joke.

I think if you actually care about the environment, if you actually care about having companies that behave well in their communities, invest in them and do the hard work of engaging with management and the boards to get them to stop being terrible custodians of the environment or of their communities and improve very specifically and tangibly in ways that you've identified they could improve. And what's really quite wonderful is when they improve, it actually can make the operations more profitable and more valuable.

Like in the case of Petrobras, the pipeline that they dropped off was a loss-making pipeline, it was never going to earn economic income. And so the stock actually reacted well to the news. People just need to work a little bit harder and focus less on marketing. I think the whole thing is a sham, frankly. Not for everyone, and I'm sure I'll get-- this won't resonate particularly well with most, but I'm glad it won't. Because it needs to change, and the whole thing is dysfunctional.

JULIE HYMAN: You know, as Brian said, we get an awful lot of folks coming to us and talking about their ESG products, right? So what do you think needs to change? I mean, you're talking about this type of engagement. But it seems like even bigger picture. There needs to be better definition of-- and this has been an ongoing issue, right, the transparency and definition of accountability when it comes to even saying what ESG means.

JAMES RASTEH: Yeah. That is such an important question. And I think that we're just not going to get the right answer to it because no two companies report their fossil fuel intake in similar terms. And so we're never going to get to a point where we can do apples-to-apples comparisons across never mind a whole industry, just two firms. So the idea of standardized data for comparison purposes is a fantasy, I think.

We're just not going to get there. And I think the effort to get there is going to be laborious in terms of cost and in terms of actually, weirdly enough, environmental impact. I think that the much more credible thing to do is to look at where a company is currently in the way it discloses its own carbon emissions, its own water usage, in its own impact on the community. Where are we at today? Where could we be at 5, 10 years from now? And what are the changes we need to make to get there?

So I think it's incomparably more valuable to focus on improvement rather than comparing companies and say, you're bad, and I'm just not going to invest in you, and invest in, like, the companies that are deemed to be good. It's like being a teacher in a classroom and thinking you're going to do a good job by entirely ignoring the extraordinarily disruptive and terrible students and only focusing on the ones who work well and seem smart. It just doesn't work like that.

JULIE HYMAN: I like that analogy. James, thank you so much for coming on. It was a pleasure to get your perspective this morning. James Rasteh is Coast Capital CIO and founding partner. Thank you.

JAMES RASTEH: Nice to be with you. Thanks very much.