Don't Fear Greeks Bearing Gifts
In Europe Don’t Fear Greeks Bearing Gifts
Kostas Tsironis/Bloomberg
A Greek national flag, left, flies beside a European Union (EU) flag in Athens on Sept. 21, 2011.
A Greek national flag, left, flies beside a European Union (EU) flag in Athens on Sept. 21, 2011. Photographer: Kostas Tsironis/Bloomberg
Lately, European markets keep giving fund manager David Marcus what he calls “gifts.” Stocks keep getting cheaper every day as Europe grapples with its financial crisis. “I’m like, enough with the gifts already,” says the manager of the Evermore European Value Fund.
Surely, these are interesting times to be a European fund manager. Some of the most distressed European markets have come close to retesting their lows from the 2008-09 credit crisis. Yet while investors pull money out of equities and run full-tilt away from risk, managers such as Marcus say the buying opportunities in Europe are among the best they've ever seen.
Marcus is a dyed-in-the-wool value investor, having previously worked for 14 years as an analyst and manager at famed value shop Mutual Series. He’s had a tough time attracting assets to his fund, which opened in January of 2010. Year to date it’s down 22 percent and has only $10 million in assets. Yet Marcus remains optimistic: “In the long-run you get some of your best investment ideas in the middle of a crisis.”
Just look at Italy, he says. On Sept. 23 the iShares MSCI Italy Index ETF, which tracks the country’s benchmark index, fell to $10.88 a share, almost half its $20 price this April and just shy of its all-time low of $10.03 on March 2, 2009. Marcus says he's seeing extraordinary values in companies like Exor SpA, parent company of automaker Fiat. “The stock is down 40 percent this year and trades for less than five times forward 12-month earnings,” he says. And it isn’t just Italy. The average foreign stock in the MSCI EAFE index has a price-to-book value of 1.3, almost half that of the S&P 500’s 2.5.
Although Europe has serious fiscal problems, there are stark differences between today’s crisis and 2008’s. Back then the problems were in the private sector; today they’re in the public sphere. It's the debt of Portugal, Italy, Ireland, Greece and Spain at risk of default, not the debt of corporations. “I have example after example of companies in demonstrably better financial shape today than they were in 2008 and yet they're trading at their 2008-2009 lows,” says Sarah Ketterer, manager of the Causeway International Value Fund. “The most extreme ones are in the European financial services sector.”
Ketterer has six percent of her portfolio in European banks such as BNP Paribas S.A., and Barclays Plc. Another six percent is in insurers such as AXA SA and Zurich Financial Services AG. Investor worries about banks' holdings of sovereign debt are overblown, she says. Even pricing in an almost complete wipeout of Greece’s and Portugal’s bonds, she says France’s BNP has so little exposure of that kind of distressed debt that its stock would fall about 20 percent. She thinks the potential upside for the company, in the more likely event of a bailout, is in excess of 150 percent.
Ketterer thinks concerns about a potential dissolution of the European Union because of its fiscal problems are unfounded. “The meltdown situation isn’t even something we’re modeling for our portfolios,” she says. “The costs for a euro zone disintegration are common knowledge among the region’s leaders and they realize it would be much too high.”
Any country leaving or being kicked out of the EU would face default on its Euro denominated debt, a devalued currency and flagging trade. According to a recent report by UBS economist Stephane Deo, "Euro Break Up - The Consequences," the cost of a weak country leaving the EU would be 9,500 to 11,500 Euro per person in the exiting country in the first year, with an estimated 3,000 to 4,000 Euros per capita cost in subsequent years.
Even if the EU were to dissolve, many European companies would continue to prosper, as much of their business is either outside the euro zone or has little to do with the health of local governments. “There’s a big difference between global franchise companies we buy, which happen to be headquartered in Europe, versus their countries,” says Alberto Jimenez Crespo, co-manager of the Nuveen Tradewinds International Value Fund. “Their countries are a total mess, but their businesses have very strong franchises and earnings power. They’re growing in emerging markets and have very significant means to pay their dividends.”
In fact, Crespo says dividend yields on many European stocks exceed that of ten-year government bonds in the region -- yet the companies are in better financial health than the governments. He owns GlaxoSmithKline Plc and Sanofi, as well as telecom plays Vodafone Group Plc and Belgacom SA, all of which have strong cash flows and dividend yields in excess of 4 percent. “If you look out at the next 20 years, the chances of [these four companies] having strong earnings power and being able to pay their dividends are significantly higher than the chances of European governments remaining solvent,” he says. After all, even if the EU goes away, people will still need to call their doctors to get medicine.
(Lewis Braham is a freelance writer based in Pittsburgh.)
To contact the editor responsible for this story: Suzanne Woolley at swoolley2@bloomberg.net
Rate this Page