Bowing to peer pressure from Eurocentric readers, today’s comment focuses squarely on opportunities in European indexes, or should that be ‘bourses.’ It seems that European stocks are at their cheapest levels in six years and the French and German stocks top the list of bargains on the continent.
According to Bloomberg, the XETRA DAX and France’s CAC 40 are the least expensive of the world's 10 biggest markets. But let’s not get carried away just yet... markets are often said to be cheap when stocks have fallen, rather than the preferential scenario where huge profit growth has been missed by the market. We’re seeing the prior here, falls in earnings and a bearish turn in sentiment.
First-quarter corporate profits in Western Europe dropped 25%, even worse than US firms! "The U.S. has been at the epicentre of the problems, but the shockwaves are more felt here in the euro zone. Cheap valuations are a direct result," said fund manager Franz Wenzel.
Despite this, the contrarian club is unshaken... is it time to buy?
Well, according to Anthony Bolton, the negativity can act as a cloak to sneak in and pick up the real pearls. It is always difficult to buy recovery stocks, but it’s when stocks are at their most unloved is where the biggest rewards can be had. Do your buying in a bear run, and superior returns can be yours.
It’s this belief that propelled Warren Buffett onto a shopping tour of Europe in recent weeks, with a focus on Germany.
"We would like more family owners of Germany businesses who, when they feel some need to monetize their business, to think of Berkshire Hathaway," said Buffett.
"We are happy to invest in businesses that earn their money in the euro, or in companies that derive their earnings in Germany, or from sterling in the U.K. because I don’t have a feeling that those currencies are going to depreciate in a big way against the dollar," added the world’s most successful investor.
And he might be onto something... Ben Traynor at the Fleet Street Letter tells me that companies in the French and German markets are trading at a 40% discount to those in the American S&P 500. It’s a market packed with right bobby dazzlers.
So, why the weakness?
Profit warnings left-right-and-centre is why. Not just in banking, neither. Nokia, SAP, InBev, Roche are all firms that have fallen short of expectations through the tumultuous earnings season. It’s not just poor headline figures, but weak outlooks that really put the fear of god into investors. Commodity prices and inflation is soaring, knocking input costs while demand is set for a tumble as buyers grapple with the increasingly pricey Euro.
Though it could have been a lot worse. Earnings in the first quarter fell 18% but were odds-on to fall 23%. And, if you strip out the performance of financial firms like UBS and Deutsche Bank, the first quarter would have actually been in-the-money.
Big banks still see Europe slightly higher for the year, and back in double-digit growth for 2009. Too optimistic? Reasons to be cautious? Probably, but given the discount that shares on the continent trade at, it looks to be worth the risk.
We tend to find more value opportunities in a bearish market, and this is no exception. Whilst it can be emotionally difficult to pick up companies that have been receiving a bad press, if you can justify the purchase in value and growth then you go with your convictions.
Deutsche Bahn steams into the picture
And here’s the newest stock on offer... Deutsche Bahn, Europe's biggest rail group, is en route to be one of the biggest stock market listings of the year, set for a £6.4 billion initial public offering (IPO).
The German rail operator is set to list on the DAX with Deutsche Bahn itself to control most of the consideration with a 25% stake selling in the IPO. The launch is set for the end of the year and should reassure investors that there is still a market, and hopefully an appetite for new listings amid the credit crunch.
Nonetheless, I’m not a fan of IPOs. I subscribe to the Ken Fisher school of thought that IPO should stand for ‘It’s Probably Overpriced.’ This is based on the frequent share price capitulations that follow the initial ‘stabilisation’ or honeymoon period &mdahs; where newly listed companies shares are bought by investment banks to prop up the price in the early days. When this support subsides, the shares invariably take a tumble.
More important than the investment case of Deutsche Bahn is that, like Visa in the US, the gesture will give heart to the investment community. It serves as evidence of life after the credit crunch. When shares are trading as cheaply as they are now, it may be the best time to stock-up on shares across the border.
The sharp cookies over at The Fleet Street Letter have not been MIA on European opportunities... our portfolio includes a Paris-listed gem that has outperformed the market by nearly 30% since our tip in 2007. With property rights in the South of France, it has profited from high-net-worth individuals and looks set to continue...
Theo Casey
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