European Stocks Near Cheapest Ever as Invesco Buys Repsol
Two years of losses have pushed European equities toward the lowest valuations ever, prompting fund managers from Invesco Ltd. to JPMorgan Chase & Co. to increase holdings in Spain, Italy and Germany.
While the Euro Stoxx 50 Index has fallen to 0.9 times book value, cheaper than any time except the week markets bottomed in March 2009, Invesco is betting on Repsol SA (REP), the Spanish oil producer. London-based Artemis Investment Management LLC is buying stock in Amplifon SpA (AMP), a hearing aid maker in Milan. Fidecum AG is adding shares of German lender Aareal Bank AG. (ARL)
Two emergency plans for lenders from the European Central Bank, four national bailouts and 18 summit meetings for heads of state have failed to keep the euro region’s share gauge from dropping. With more investors than ever saying European equities are undervalued in a monthly survey by Bank of America Corp., managers who help oversee about $430 billion say they are finding bargains across the continent.
“What’s in the price for Europe is beginning to be Armageddon,” Stephanie Butcher, who helps manage $62 billion at Invesco Perpetual in Henley-on-Thames, England, said at a presentation on June 26. “This is a region that has been hugely de-rated, that has a lot of high-quality international assets that are very lowly valued. This is an unusual circumstance and one offering genuine opportunities.”
The Euro Stoxx 50 (SX5E) for the 17 euro nations fell 30 percent from February 2011 through yesterday, wiping about $1.1 trillion from European equities, as Ireland, Portugal, Greece and Cyprus sought rescues after borrowing costs surged. Spain asked for 100 billion euros ($124 billion) to shore up its banks. The gauge jumped 5 percent today after leaders attending a European Union summit agreed to waive national government’s preferred-creditor status on bailouts for Spanish lenders. They also pledged to spend $149 billion to stimulate the economy.
Companies in the gauge fell to 0.93 times book value, or assets minus liabilities, this month amid concern grew that Greece will be forced to drop out of the euro. That’s the lowest ratio since March 6, 2009, the week that preceded a 70 percent rally in the equities gauge.
Forty-five percent of respondents in a Bank of America regional survey of fund managers released June 12 said euro-zone shares are undervalued, the highest for any region since at least 2001. Participants in the poll oversee $297 billion.
Repsol, the Madrid-based oil company whose YPF unit was seized by Argentina this year, is trading at 57 percent of its book value after falling to a nine-year low this week. That’s the least since at least 1999, according to data compiled by Bloomberg. The company trades at 7.4 times its estimated 2012 earnings, compared with 13.6 times for BG Group Plc, a U.K. oil company that explores in Brazil.
The share drop suggests “falling returns and no asset growth” at Repsol, an incorrect assumption, said Invesco’s Butcher.
Money-manager Laurent Millet has 9 percent of the Artemis European Opportunities fund in Spanish stocks, including Amadeus (AMS) IT Holding SA, an operator of booking services for airlines.
Amadeus has risen 26 percent this year, compared with the 22 percent decline in Spain’s benchmark IBEX 35 Index. The Madrid-based company posted a 23 percent increase in passengers boarded in the first quarter, from a year earlier. The shares are trading at 11.9 times estimated earnings for 2012, below the 12.8 average ratio since 2010, data compiled by Bloomberg show.
Millet bought Amplifon in the last month. The stock is little changed over the past two years even as earnings are set to rise 30 percent in 2012, according to analyst forecasts compiled by Bloomberg. He’s avoiding financial shares even though the Euro Stoxx Banks Index (SX7E) trades at 0.4 times book value.
“One of the big mistakes investors are doing is looking at the market through the macro risks, and not every company trading in Spain or Italy is a risky bet,” Millet, who helps oversee $17 billion in London, said in a phone interview on June 27. “Valuations are incredibly cheap.”
Economic concern prompted Pictet Asset Management, the Geneva-based investment group overseeing $124 billion, to lower its recommendation on European shares on June 1. It cited “significant political-event risk in the euro zone and the region’s weaker economic momentum” in a note to clients. Alliance Trust Plc, the 124-year-old U.K.-listed investment company, has also cut holdings.
“It’s one of those challenging things where there is value, but there is also risk,” Katherine Garrett-Cox, chief executive officer at Alliance Trust, said in an interview on June 27. “In the cold light of day, this is the part of the world where we see significant downside risk.”
The euro area probably entered a recession, defined as two consecutive quarters of economic contraction, in the second quarter, according to economists’ forecasts on Bloomberg. Italy’s economy is forecast to shrink by 2.3 percent in its third consecutive negative quarter, while Spain’s may drop by 1.5 percent in the three months from the year-earlier period, the forecasts show.
EU leaders meeting in Brussels yesterday and today are discussing a plan for closer European integration spearheaded by EU President Herman Van Rompuy that centers on common banking supervision and deposit insurance. German Chancellor Angela Merkel gave in on expanded steps to stem the debt crisis as euro governments can now access rescue loans without relinquishing control of their economies.
Speculating on declines may be a losing bet because of the likelihood of more government aid, Deutsche Bank AG said June 26. The Frankfurt-based bank advised investors to close underweight positions in European equities ahead of the EU summit, saying that “expectations are fairly low and any positive surprises are likely to fuel outperformance,” according to a note to clients.
Economists expect the ECB to cut the key interest rate by 25 basis points to 0.75 percent by the third quarter to stop credit markets from freezing and avoid a deposit run in some nations, Bloomberg data show. The ECB may extend its long-term lending plan, according to Societe Generale SA.
Fidecum, an asset manager in Bad Homburg, Germany, last month added shares of Aareal Bank, the German property lender whose stock has plunged 51 percent since July 2011 as the debt crisis curbed its business, according to a May 31 report to clients. The stock is trading at 0.4 times its book value, down from as high as 1.6 in 2006.
The Fidecum Contrarian Value Euroland fund bought shares in Bull (BULL), a French maker of computers that has fallen 53 percent since June 2011 in Paris trading.
Raj Tanna, a strategist who helps manage $280 billion at JPMorgan Private Bank in London, said losses in the euro zone present a buying opportunity.
“Europe is home of some of the best global companies in the world and their fundamentals are as strong as they have been in a number of years,” he said in an e-mailed response to questions. “The share prices of these high-quality corporations have fallen in sympathy with the broader market, unveiling very attractive opportunities.”
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