European stocks offer some of the world’s best investment opportunities even after outperforming other markets this year, in part because Greece’s festering crisis scared away buyers, said David Herro, one of the biggest U.S. owners of shares in the region’s companies.
Greece’s struggle to obtain a new bailout, and its potential exit from the euro, highlight the structural flaws in the European Union, said Herro, chief investment officer for international stocks at Harris Associates in Chicago. As a result, he’s loading up his $30 billion Oakmark International Fund with shares of companies such as BMW AG and BNP Paribas SA at attractive prices.
“If you look at valuations around the world, you really still see the preponderance of value based in Europe,” Herro said in a telephone interview Friday. “If you look at the last two to three years, clearly this Greek thing has been a great deal of the reason for this. People see the potential disintegration of the euro zone and they make a macro call and they want to just not be involved in the market.”
Concern over the Greek crisis has been a drag on European stocks after they posted the best first-quarter rally since 1998. The Stoxx Europe 600 Index flirted with a correction last week, falling almost 10 percent from an April record through Tuesday before paring some losses. That has pushed its valuation to 16.5 times the estimated earnings of its companies, compared with a high of 17.4 times in April.
The gauge climbed 1.6 percent at 11:14 a.m. in London.
Many of the Europe’s largest companies earn a big chunk of their profit in other parts of the world, so they’ll do fine even if the region’s economy struggles, he said. And he does expect it to struggle. The euro region is a flawed project because countries like Greece and Germany are too dissimilar to be in it together, Herro said.
Also, government spending on social welfare in Europe is unsustainable, especially in countries that don’t have growing populations, he said. While countries such as Ireland, Spain and Italy have taken or are taking steps to fix these “structural deficiencies,” others, notably France, haven’t, he said.
“There will be a lack of investment, a lack of robustness, a lack of productivity growth, a lack of economic growth in Europe until they address these structural rigidities,” he said. “That’s not a reason to be invested or not invested in Europe, because they have some really good, strong global businesses with good management teams selling at attractive valuations for the medium- and long-term investor.”
European consumer-product companies also are suffering from the slowdown in China and other emerging markets, so their share prices have been depressed, said Herro, who owns shares in Diageo Plc, the maker of Guinness stout and Johnnie Walker whisky, and Cie. Financiere Richemont SA, the Swiss manufacturer of Cartier jewelry and Montblanc pens. That’s allowed him to accumulate shares in anticipation of a rebound in those economies, he said.
While BMW shares slumped more than 20 percent from their peak in March on concerns about China, the company “is actually doing quite well around the world,” Herro said. “Their recent sales numbers were quite strong even though China slowed down.” The stock is attractive at 9.4 times next year’s earnings, he said. BNP, which Herro also owns, trades at 9.8 times projected profit, compared with 16.5 times a year ago, data compiled by Bloomberg show.
Herro owns shares of one Greek company, Titan Cement Co., in his $3.5 billion Oakmark International Small Cap Fund. Only 20 percent of its operating profit comes from Greece, with the rest from Egypt, the U.S. and the Balkans. “It’s like a four-legged chair, and only one of the legs is dependent on Greece,” he said. Standard & Poor’s last month raised its outlook on the company’s debt to positive from stable.
While markets rose Friday on optimism that a deal will be struck to keep Greece in the euro region, any declines in coming days will be a buying opportunity, said Herro, whose flagship fund has returned 17.8 percent annually the past three years, beating 95 percent of similar funds.
“The market prices are extremely volatile; the underlying valuations are relatively stable,” he said. “With or without a Greek deal, BNP Paribas, or BMW, or Daimler, or Allianz, they’re not worth any less. If for some reason the share prices drop dramatically, we would be looking to add to our positions.”