By Sam Mamudi
As far as most internationally focused mutual-fund investors are
concerned, the news from Europe is nothing but gloom and doom:
Greece needing a bailout, the euro under unprecedented pressure,
and the prospect of political turmoil in the U.K.
Yet European stocks haven't been feeling quite as much pain as
one might expect.
European-stock funds lagged their international counterparts in
the first quarter, with the average European fund slipping 0.4%,
according to preliminary data from fund-tracker Lipper Inc.
The quarter's big winner: Japanese stock funds, up 7.5%,
reflecting improved business conditions and a weaker yen that makes
Japanese exports more attractive.
Other once-hot regions seeing muted fund returns included China,
down 0.2%, and Latin America, which eked out a 0.4% gain. Emerging
markets funds rose 3.3%, while Pacific Region funds that exclude
Japan added 2.4% and those invested in Japan gained 4.4%.
Finding Value
Europe was clearly the lightning rod for global investors over
the past three months. Some European-based fund managers contend
that extreme fears about the region have been overblown.
"The macro troubles temper some of my enthusiasm for the
[European stock] markets, and European stocks aren't a slam dunk
for success," said Rob Jones, London-based manager of Threadneedle
European Equity Fund (AXEAX), which returned 0.4% in the quarter.
"But on balance I think the recovery here has been underestimated
by investors."
The view from European managers is that while Europe's troubles
likely mean lackluster markets in the medium term, there are
opportunities for investors willing to brave the bad news.
Managers point to several reasons for this: many European
companies see revenues come in from outside the region; heavy
discounts are already priced in to European stocks; and the
continent's corporate culture has become increasingly
shareholder-friendly in recent years.
London-based Heather Arnold, deputy director of research at
Templeton Global Equity Group, said that while Europe has lagged
recently, Templeton Global Portfolios are overweight the region in
part because shares are relatively inexpensive, about 20% to 30%
cheaper than their Asian or U.S. counterparts.
The expansion of the EU has also helped European companies cut
labor costs.
"It's more palatable to move a manufacturing plant from
Dusseldorf, Germany to somewhere in Hungary [than leaving the
continent altogether]," said Paris Anand, head of European equities
at F&C Capital. Hungary joined the EU on May 1, 2004.
Anand believes that European companies are also attractive today
because of their increasing focus on shareholder value.
Historically run by political considerations or the whims of a
powerful chief executive, companies are now focusing more on
rewarding their investors.
The Foreign Dimension
One fact about European companies that's often overlooked by
outside investors is that many of the continent's leading stocks
don't depend on their domestic markets.
Almost all the managers who spoke to MarketWatch said they held
Standard Chartered , despite the carnage in the U.K. banking
sector. That's because Standard Chartered is one of the dominant
banks in Asia, and has what Jones called an excellent management
team.
"They are restrained when they need to be -- they're quite a
conservative bank in a growth market, which is a pretty good
combination to have," he said.
And despite Spain's well-documented woes, several managers said
they liked Spanish bank BBVA .
"They are very strong in Latin America and an attractive
prospect for a long-term investor," said Bertie Thomson, a member
of the European equity team at Aberdeen Asset Managers Ltd. "But
40% of their revenue is from Spain, and that's dragged down the
stock."
Despite the bullish talk, the worries plaguing European
economies will affect their local markets. Fund managers that
invest in companies with mostly domestic businesses do so under
very particular conditions.
Anand said that he sees "a sluggish hangover" for many companies
recovering from the recession, with higher financing costs in
particular. That, he said, will help larger companies, who'll find
it easier to raise money and also benefit from economies of scale
and better brand recognition and marketing. He named Akzo Nobel NV
(AKZOY), maker of Dulux paint, as a dominant company that's likely
to benefit from the tougher marketplace.
"In a difficult business environment it's hard to compete but
the strong will get stronger," he said.
Franklin's Arnold said investors should expect European
companies to face harder business conditions in the near to medium
term, as tax rates, labor costs and regulatory pressures are all
expected to rise. There will be margin erosion she said, and
companies will have to work harder to keep up their
performance.
"We have a very tough couple of years ahead of us," added
Aberdeen's Thomson.
Thomson said he expects a stagnant macro picture in Europe, and
this means that companies that can enjoy structural growth are more
attractive. Engine-maker Rolls Royce Group and Schindler Holding
(SHLRF), the world's largest escalator manufacturer and
second-largest maker of elevators are both good bets, he said,
because each unit sale brings decades worth of need spare parts and
servicing.
Thomson said Aberdeen is avoiding sectors with too much exposure
to Europe's economy, such as telecommunications firms.
Much of the focus in the U.K. is on the general elections slated
for May 6. There is a chance that the elections will result in a
hung parliament -- no party with a majority and the need for a
coalition. This would likely lead to a period of uncertainty about
which parties would make up a coalition and who would lead it, and
the consensus view is that the markets would react badly.
Anand said that the upcoming election may have forestalled some
of the worst effects of the recession as the ruling Labour Party
tried to keep conditions as pleasant as possible.
"Post-election in the U.K., the reality of the on-the-ground
economy could take a step backwards," he said. "There haven't been
as many bankruptcies as perhaps there should have been."
But even here, Anand has found some stocks he likes, naming
Robert Wiseman Dairies as one example; the firm is poised to
benefit from the secular shift away from doorstep milk deliveries
toward consumers buying milk at grocery stores.
International stock-fund leaders and laggards
Sector Quarter return 1 Year
Japan 7.5% 41.1%
International Small/MidCap Value 5.22 77.5
International Small/MidCap Growth 3.6 70.9
International Large-Cap Growth 2.0 53.5
International Large-Cap Value 0.5 53.3
China Region -0.2 69.0
European Region -0.4 57.0
Data: Lipper Inc. (As of 3/31/10)
-Sam Mamudi; 415-439-6400; AskNewswires@dowjones.com