GOOD HUNTING IN BAD ECONOMIES
Europe's bourses are rallying, short-term interest rates continue to fall, and economic recovery beckons. So why are investment pros suddenly getting picky? Because even as Europe limps out of recession, corporate profits are going to remain dismal for quite a while. That could lead to some nasty surprises for investors who have seen cheaper money push up nearly every stock in sight for two years straight.
With earnings fading, many money managers advise shunning blue chips. They maintain that small-capitalization stocks--those with a market value of $750 million or less--will best weather Europe's earnings woes. Even these companies have been hit by recession. But with European markets up about 20% in dollar terms in 1993, this is still the area where bargains can be found.
Not only do the small caps offer the best chance of a profit rebound as the economy recovers, but they also sell at price-earnings ratios that can be half those of the blue chips. For example, Nicolas Schlumberger, a French maker of weaving equipment, sells for about 14 times earnings, vs. an average of 26 for the Paris bourse. Or take Gunther & Sohn, a Leipzig-based homebuilder that is making big profits putting up homes in eastern Germany. It's selling at 10 times earnings, against about 25 for the construction industry average.
NO FEAR. Some of Europe's best small-cap companies can be found in the worst economies. That's what Claire Griffiths has discovered. The manager of Invesco's European Small Companies fund in London, she tracks 80 companies spread across 13 countries. Although 43% of the fund's assets are in recession-wracked Germany and France, Griffiths has parlayed investments in housing construction and hospitals to a 42% gain over the past 12 months.
Buoyant as they are, small-cap stocks aren't the only way the pros are navigating Europe's troubled waters. European leaders may bemoan the region's flagging competitiveness, but David Donnelly, manager of Skyline Europe Portfolio, a Chicago-based mutual fund, targets "Euro-global" companies that have used the discipline of Europe's year-old single market to raise efficiency and shift production to cheaper locales. Donnelly likes Britain's Cable & Wireless PLC for its big stake in Hong Kong Telecom. He's also keen on France's Lyonnais des Eaux and G n rale des Eaux, as much for global diversification as for their waterworks expertise.
Even blue chips still have their adherents. Wolfhard Graetz, chief investment officer at Bank Vontobel, is warming to a Dutch electronics giant Philips and France's Compagnie Financi re de Suez. He figures both have "done the right thing" in restructuring to earn them a place as long-term recovery plays. But after these two, the list trails off. For many European stock-pickers, the guiding philosophy right now is: To earn big, think small.
STOCK PICKS FOR A GLOBAL RECOVERY PACIFIC RIM Recent price per share HONG KONG $60* TELECOM HONG KONG The colony's phone giant SWIRE PACIFIC 8 HONG KONG Wheeling and dealing in China THAI FARMERS 4 BANK THAILAND Profits could jump 15% NEWS CORP. 54* Focusing on Asia LATIN AMERICA Recent price per share TELEFONOS $62* DE MEXICO MEXICO Profits and dividends rising CTC 88* CHILE Southern telecom star CEMEX 26 MEXICO Rebuilding Mexico Inc. TERRABUSI 4 ARGENTINA Its snacks are hot EUROPE Recent price per share CABLE & $22* WIRELESS BRITAIN Zeroing in on Asia CARLTON 27* COMMUNICATIONS BRITAIN Eyeing British TV licenses PHILIPS 20* NETHERLANDS Restructuring bearing fruit ESPIRITO SANTO 35* LUXEMBOURG