Bargains Beckon Funds to Europe With S&P 500 Past Prime
American mutual funds are scouring Europe for bargains, snapping up Dutch oil drillers, French drugmakers and Swiss food producers on speculation the region’s rally is just beginning as the U.S. bull market ages.
Oliver Pursche, a Suffern, New York-based manager beating 97 percent of rivals in 2013, bought Total SA and Royal Dutch Shell Plc for their relatively high dividends and low valuations relative to peers. Sanofi in Paris is among about 25 new stocks added by Timothy Ghriskey’s Solaris Asset Management LLC in Bedford Hills, New York. Overseas companies that get most of their sales from within the U.S. are favorites of Paul Zemsky, the head of asset allocation at ING Investment Management.
The allure of European stocks is drawing managers with almost $5 trillion under management after $13 trillion was added to U.S. equity prices since March 2009 and the Standard & Poor’s 500 Index capped its best stretch of gains since 2004. While investors speculate the Federal Reserve will cut stimulus in March, they are betting the European Central Bank will keep economic measures for longer. Europe’s economy is forecast to return to growth next year.
“This is a good time to be trimming back now and increasing the international allocation,” Russ Koesterich, the San Francisco-based chief investment strategist at BlackRock Inc., said in a Dec. 3 phone interview. BlackRock is the world’s largest money manager with $4.1 trillion as of Sept. 30. “Parts of Europe are under-owned by investors. These are places where there’s still a lot of pessimism, so any good news can produce some run-ups in these stocks.”
Equities around the world fell last week as investors speculated when the Fed will reduce stimulus. The S&P 500 declined less than 0.1 percent to 1,805.09, the first weekly drop since Oct. 4, curbing the 2013 gain to 27 percent. The Stoxx Europe 600 Index lost 2.7 percent, bringing the year to 13 percent. The 1.8 percent drop in the Topix Index trimmed this year’s rally in Japanese stocks to 44 percent. The S&P 500 gained 0.2 percent to a record 1,808.37 at 4 p.m. New York time today.
The S&P 500 has risen 167 percent since March 2009 and surpassed the record high set in October 2007 by as much as 15 percent. The bull market has lasted 57 months, about nine more than the average since World War II, according to data compiled by Bloomberg and Birinyi Associates Inc. With this year’s 27 percent gain on track for the best annual return in 15 years and pushing valuations to the highest in almost four years, some investors are going outside the U.S. to pick stocks.
“Companies in Europe that are exposed to Germany or the United States are going to do better because they are still trucking along,” Zemsky, whose firm oversees $190 billion, said in a Dec. 4 phone interview. “There’s definitely a globally synchronized recovery going on and at the same time, you have a situation where central banks aren’t trying to stop it. They’re actually trying to encourage it.”
Pioneer Investments is recommending that investors prune their holdings of U.S. equities, saying that the improving economy has reduced the scope for Fed stimulus to propel further gains in stocks. Chief Investment Officer Giordano Lombardo, who oversees about $228 billion of investments globally, said in Paris last week that he recommends having an underweight position in U.S. equities and an overweight position in European, Japanese and Chinese shares.
Companies with lower-than-average valuations and high dividend payouts are the most attractive, according to Pursche, who manages about $800 million as president of Gary Goldberg Financial Services. Shares of Paris-based Total, Europe’s third-biggest oil producer, trade at about 8.7 times projected earnings and Shell at about 9.4, compared with 15 for the Stoxx 600, data compiled by Bloomberg show.
Total, which agreed to buy a stake in InterOil Corp.’s assets in Papua New Guinea last week, has a dividend yield of 5.5 percent, and The Hague-based Shell pays out 5.5 percent, Bloomberg data show. Both are twice the 2.5 percent dividend yield of Exxon Mobile Corp. and more than Chevron Corp.’s 3.1 percent. Shell, Europe’s largest oil company, plans to cut net spending next year by increasing the pace of asset sales, according to Chief Executive Officer Peter Voser.
“When you look at these companies and compare them to Exxon or Chevron here in the U.S., they’re much more attractively priced and they’re in the same business,” Pursche said in a Dec. 4 phone interview. “Thematically, we like the energy space.” He said he’s also buying Kit Kat bar-maker Nestle SA in Vevey, Switzerland, and Novartis AG, Europe’s biggest drugmaker by sales.
Sanofi, the largest drugmaker in France, is poised for a rebound, according to Ghriskey, who manages about $1.5 billion. The company will return to earnings growth this quarter, CEO Chris Viehbacher said in an Oct. 7 Bloomberg Television interview. Its multiple sclerosis pill Aubagio was cleared by the U.K.’s health-cost regulator last week. The drugmaker, which gets about 76 percent of sales from outside Western Europe, will boost income 13 percent next year, following three years of declines after losing patent protection on nine products, analyst estimates show.
“The issues have become totally resolved,” Ghriskey, who is also buying shares of Seadrill Ltd. for its dividend, said of Sanofi in a Dec. 4 telephone interview. “We should see strong growth numbers, and it’s priced below the large-cap pharmaceutical company average, so valuations are low.”
The stock trades at 13 times estimated earnings, 19 percent less than the average price-earnings ratio of health care stocks in the Stoxx 600. Sanofi shares are up 4.2 percent in 2013, compared with 18 percent for its peers in Europe.
Valuations for European equities climbed 8.6 percent this year, data compiled by Bloomberg show. The expansion wasn’t enough to make shares too expensive, according to Zemsky, who said businesses that are dependent on U.S. growth will do best. Of about 200 companies in the Stoxx 600 that disclose revenue by country or region, 76 get at least half from outside Europe, data compiled by Bloomberg show.
Europe’s increase in valuations compares with a 19 percent rise for U.S. shares and 35 percent drop in Japan, according to Bloomberg data. Even with the American multiple expansion this year, U.S. stocks can rally more, according to Wells Fargo Funds Management’s John Manley.
“The U.S. is in pretty good shape,” Manley, who helps oversee $233.6 billion as chief equity strategist for Wells Fargo Funds Management in New York, said in a Dec. 6 phone interview. “Valuations based on earnings in the U.S. are still fine. I think it’s still a very good stock market going forward.”
The euro area’s gross domestic product will expand 1 percent next year after two years of contraction, according to 47 economist forecasts compiled by Bloomberg. At the same time, the U.S., the world’s biggest economy, is projected to grow 2.6 percent and Japan, the third-largest, will increase 1.5 percent.
Global growth means more opportunities for stock investors still looking for bargains, as they can benefit from a pickup in those economies without having to buy U.S.-based companies only, according to Mark Luschini at Janney Montgomery Scott LLC, which oversees $60 billion. He’s buying Continental AG, the German auto-parts maker, as well as London-based Vodafone Group Plc, the second-largest wireless company, and the WisdomTree Japan Hedged Equity Fund.
“You can spread your risk around,” Luschini, chief investment strategist, said from Philadelphia in a Dec. 3 phone interview. “The reward for that risk-taking will be greater in non-U.S. equities.”
European banks trade at about 14.2 times projected earnings, compared with 16.1 for the region’s health care stocks and 27.6 for technology companies, according to data compiled by Bloomberg. To David Herro at Harris Associates LP relatively low valuations at companies such as Credit Suisse Group AG, the second-biggest Swiss bank, make them buys after the global equity-market rally this year.
The Zurich-based company, whose sales are split almost evenly between the Americas, Switzerland and the rest of the world, has a price-earnings ratio of 9.4, based on estimates.
Credit Suisse, forecast to boost earnings 25 percent next year, says it has already met a core equity capital ratio requirement before a 2019 deadline. It reported a common equity ratio of 10.2 percent under Basel III rules. That was the sixth-highest ratio among 14 global investment banks, according to data compiled by Bloomberg Industries.
“This is a stock which really is at a valuation that would indicate some kind of distressed level, when in fact the business is doing quite well,” Herro, who helps oversee about $106 billion as chief investment officer at Harris Associates in Chicago, said in a Dec. 4 phone interview. “The market still has it priced like it’s some volatile financial. Yes, they have an investment bank, but most of that has been de-risked.”
Continental, based in Hannover, Germany, has a price-earnings ratio of 12, even after it rallied 72 percent this year, more than five times the Stoxx 600. Europe’s second-largest auto-parts maker has beaten analyst earnings estimates the last four quarters and raised its profit forecast for 2013 on growth in China and North America.
The manufacturer has sidestepped the effects of the region’s car-market contraction by adding sales to customers including Volkswagen AG and Bayerische Motoren Werke AG in growing markets such as China and the U.S. Continental gets 27 percent of its revenue from Europe outside Germany, 16 percent from North America and 14 percent from Asia, data compiled by Bloomberg show.
“They have a good balance of exposure, so in essence you’re not betting on any one company or area,” James Moffett, who oversees $10 billion in international assets at Scout Investments in Kansas City, Missouri, said in a Dec. 4 phone interview. “It’s both the earnings and the market pricing, which helps with the question of how do you try to play with what can be a tricky market next year.”
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