Buying Europe Banks Is Easy for Herro as Cheap Stocks Fall
European banks, Japanese carmakers, Hong Kong developers and Russian oil producers have gotten so cheap that stock investors from Harris Associates LP’s David Herro to Aberdeen Asset Management’s Kathy Xu are buying.
“I’ve been significantly adding,” said Herro, whose $7.9 billion Oakmark International Fund beat 81 percent of peers in the past three years. “Even though it feels gloomy, this type of environment makes my job quite easy.”
The retreat that erased $3.6 trillion from global stocks this quarter has left more than 580 companies in MSCI Inc. indexes, including BNP Paribas SA (BNP) and OAO Gazprom (GAZP), valued at less than their net assets, data compiled by Bloomberg show. The cheapest shares trade for an average 0.7 times book value. That compares with 9.6 for the most expensive equities, led by health-care and consumer products companies such as Kimberly- Clark Corp. whose earnings aren’t tied to the economy.
Stocks with the lowest price-to-book ratios have returned an average 6.2 percent per quarter during the past decade, beating the 4.3 percent gain for shares with the highest valuations, according to data compiled by Bloomberg.
Xu, whose Aberdeen China Opportunities Fund (GOPAX) topped 94 percent of peers the past three years, has been adding Hong Kong developers after China’s economic slowdown and corruption probes sent valuations to a five-year low versus global peers. HSBC Global Asset Management, with about $400 billion of client assets, says Russian energy companies are attractive after they fell to a 45 percent discount to their net assets, the cheapest level since 2009.
The declines show that most investors are still more concerned with preserving their capital than earning higher returns, five years after the collapse of securities tied to subprime mortgages helped trigger the global financial crisis.
Shares with the lowest price-to-book ratios retreated an average 10 percent since March, led by companies linked to Europe’s debt crisis and the economic slowdown. They trailed the most expensive shares by 7.2 percentage points, the widest gap since Bloomberg began tracking quarterly data in 2002.
“We can find many value stocks at current levels,” saidXu, a Hong Kong-based money manager at Aberdeen, which oversees $295 billion and held about 18.9 million shares of Sun Hung Kai Properties Ltd. (16), Hong Kong’s biggest developer by market value, at the end of May. “We’ve topped up some of our weightings.”
Global investors surveyed by Charlotte, North Carolina- based Bank of America Corp. from May 31 to June 7 cut their equity holdings in Russia and Japan and had their biggest underweight positions in banks, meaning they own less of the shares than are represented in benchmark indexes.
The respondents, who manage a combined $689 billion, favored health-care companies and household-products makers. Kimberly-Clark (KMB), the Dallas-based maker of Kleenex tissues and Huggies diapers, has jumped 10 percent this quarter and hit an all-time high in New York trading on June 19. The shares are valued at 6 times net assets, the highest on a quarterly basis since December 2001, according to data compiled by Bloomberg.
“We’ve kicked around this question quite a bit of whether we’re brave enough to buy into some of the deeply undervalued but risky stocks,” said David Semple, who oversees about $35 billion as director of international equity at Van Eck Global in New York. “I don’t think we’re there yet.”
Europe’s economy stalled in the first quarter while Japan’s May exports to the region fell 0.9 percent, hurt by the yen’s 4.5 percent rally against the dollar since March 15. Economic growth in China slowed to the weakest pace since 2009 in the first quarter. Oil, Russia’s biggest source of export revenue, has tumbled 21 percent this quarter.
“Until we have more visibility from a geopolitical perspective, it’s difficult to be particularly bullish on the Russian market,” said Gareth Morgan, a London-based money manager at F&C Investments, which oversees about $157 billion.
The cheapest stocks now are favored most by analysts, who predict average gains of 24 percent for the group and 27 percent earnings growth during the next 12 months, according to about 12,000 estimates compiled by Bloomberg. That compares with an average return prediction of 14 percent and projected profit growth of 20 percent for the most expensive companies, the data show.
BNP Paribas may rally 36 percent after the Paris-based bank plunged to 0.45 times its reported net assets at the end of May, the lowest level on a monthly basis since Bloomberg began tracking the data in 1995, according to the average share-price projection of 26 analysts. France’s largest bank posted first quarter net income of 2.87 billion euros ($3.64 billion), topping estimates, and said it will boost capital by retaining earnings.
Moody’s Investors Service cut BNP’s long-term credit rating to A2 from Aa3 yesterday, one of 15 bank downgrades made by the ratings company. Credit Suisse Group AG (CSGN), UBS AG, Royal Bank of Scotland Group Plc, Societe Generale SA, Deutsche Bank AG (DBK) and Credit Agricole SA were among European lenders downgraded, according to a Moody’s statement.
Toyota Motor Corp. (7203), Japan’s biggest automaker, predicted in February that sales will climb 21 percent to a record 9.58 million vehicles in 2012. Akio Toyoda, president of the Toyota City, Japan-based company, said on June 4 he’s still optimistic as consumers replace older vehicles. The shares trade for 0.9 times reported book value, a 34 percent discount versus the 10- year average, data compiled by Bloomberg show.
BNP Paribas shares lost 15 percent since March, while Toyota retreated 14 percent.
“What we’ve seen now since the end of the first quarter is extreme stress on equity markets,” said Herro, whose Chicago- based firm reported a $519 million stake in BNP Paribas at the end of the first quarter and a position of about $1.1 billion in Toyota. “People like us, who really focus on good quality companies at low prices, are getting very enthused.”
Sun Hung Kai has tumbled 19 percent since March 29 after the firm’s billionaire co-chairmen were arrested by Hong Kong’s anti-corruption commission. Standard & Poor’s said in a June 15 statement that daily operations at the developer remain “intact” after the probe.
The company will boost its per-share book value by 5 percent this year, according to the average of 18 analyst estimates compiled by Bloomberg. The shares tumbled to 0.7 times book value in May, the lowest on a monthly basis since September 1998, according to data compiled by Bloomberg.
The Hang Seng Property Index (HSP), comprised of seven developers in the world’s most expensive place to own a home, sank to the lowest valuation in five years versus the MSCI World Real Estate Index (MXWO0RE), the data show.
Gazprom, Russia (INDEXCF)’s natural-gas export monopoly, has retreated 13 percent this quarter and its price-to-book ratio fell to a record low last month. The Moscow-based company was valued at 0.5 times net assets yesterday, compared with an average multiple of 1.2 since 2006, according to data compiled by Bloomberg.
Moscow-based OAO Lukoil, Russia’s second-biggest oil producer, trades for 3.9 times earnings, a 42 percent discount to its historical average. The MSCI All-Country World Energy index has a multiple of 9.1, the data show.
“The long term prospects of the Russian oil industry look promising,” said Ed Conroy, a London-based money manager at HSBC Global Asset Management, which oversees about $10 billion in stocks of the four largest emerging markets and is placing its biggest bet on Russia. “Current valuations definitely constitute a buying opportunity.”
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