Bill Fries of Thornburg International Value Fund

THORNBURG: The outlook for Japan is much improved, but still uncertain. A decade of declining asset prices — real estate in particular– has limited consumer spending due to the “wealth effect” and the expectation that deferring purchases will result in lower costs. If asset prices have bottomed, then the wealth effect headwind could disappear. If prices begin to rise, the zero-interest rate policy could finally get traction and economic growth could be strong. The GDP growth in the recent quarters is encouraging.

We currently have about 12.2% of our assets in Japan.

S&P: What about the strength of the yen relative to the dollar?

THORNBURG: A rising yen will probably hurt Japan’s economy, but a weak dollar may spur regulatory reform in Japan and in Europe.

If the yen continues to strengthen, it could threaten the earnings of some big Japanese exporters. Despite this, Japanese exports remain strong, with industry leaders such as Canon, Honda and Toyota boosting exports.

S&P: What kind of foreign companies are immune to the fluctuations of the U.S. dollar?

THORNBURG: There are certain companies which are fairly isolated from the U.S. economy — for example, Kingfisher PLC and Tesco PLC, two UK-based retailers without U.S. operations.

Also, certain service providers such as telecommunications companies Mobile Telesystems (Russia), NTT DoCoMo (Japan) and Chungwha Telecom (Taiwan) and OTP Bank in Hungary are regionally focused.

There are also some foreign companies which are exposed to the U.S. dollar, while gaining market share at the expense of American companies. For example, Japanese carmaker Toyota Motors, whose sales recently surpassed Chrysler’s, and Samsung Electronics, whose share of the global cellular handset market rose from virtually nothing a decade ago to 10% today.

S&P: What is your view of Latin American markets, particularly Brazil and Mexico, both of which have performed very well this year?

THORNBURG: There is always more risk in the emerging markets, but you can find solid companies selling at large discounts in those regions.

One holding, Embraer, the regional jet manufacturer and Brazil’s largest exporter, is a world-class company in a business transacted in dollars. The stock became attractive due to drop in travel after 9/11, the company’s Brazilian domicile, a single-digit p/e multiple, and a 5% dividend yield.

Walmex (Wal-Mart de Mexico), Wal-Mart’s counterpart in Mexico, has thrived due to a great business model, minimal competition, strong growth, and attractive valuations.

S&P: Emerging markets, particularly Russia and Eastern Europe, are doing very well this year. Does this continue to be a “fluke”?

THORNBURG: We do not think that strong Eastern European performance is a “fluke.” For example, OTP Bank in Hungary is capitalizing on its large share of the mortgage market, which is in the early stages of taking off due to very low penetration and favorable governmental policies.

Mobile Telesystems, the Russian cellular provider, has been adding a million subscribers per month, although its penetration is still low outside major cities.

We currently have a 20.8% exposure to emerging markets.

S&P: Is it imperative for the U.S. economy to rebound for the world to follow suit? Are you convinced that the American recovery will continue?

THORNBURG: In an increasingly global economy more business is being done across borders and companies are more dependent on their international customers. U.S. corporations receive many supplies from overseas and are increasingly outsourcing manufacturing.

The U.S economy is showing signs of recovery — the combination of monetary and fiscal stimulus has been a big positive. The capital equipment overhang has probably diminished, and inventories are low.

All things considered, the near-term outlook for the U.S. economy and corporate profits is very favorable.

*An earlier version of this interview published on October 10 supplied incorrect information on the fund’s overall Star rank. The portfolio carries an overall rank of 3 Stars by Standard & Poor’s, not 5 Stars, as originally issued.