Investment managers tell Businessweek.com where they’re finding the best bargains. One focus: companies with large exposure to emerging markets. The European stock market has become a textbook example of how investors can throw the baby out with the bathwater during times of excessive fear of an economic disaster. True, the euro’s value has fallen 10 percent since its recent peak on Apr. 14, and the sovereign debt of Greece was downgraded to junk by Standard & Poor’s, raising concerns about possible defaults in other countries. But many portfolio managers continue to see opportunity in Europe. A key reason: a competitive advantage for European exports due to currency weakness.
“I think the world GDP growth trend is intact,” says Dean Tenerelli, who manages the $685 million T. Rowe Price European Stock Fund (PRESX). “I think it’s a time to be looking [for oversold stocks] and a time to be buying.” He suggests searching for companies in economies farther from the center of the sovereign debt crisis and making distinctions between those likely to make the most and least severe fiscal budget cuts. Italy has a smaller fiscal deficit than either Ireland or Spain, for example, so it will probably have less cost-cutting—with a less pronounced impact on economic growth.
A key feature when looking for stocks to buy: ample exposure to growth markets outside of Europe, particularly emerging markets. Consider this: At a time when European households are likely girding up for major cutbacks in government services and other austerity measures that will have to be imposed to pay for the European Central Bank’s $1 trillion rescue package for Greece, demand for luxury goods made by LVMH Moët Hennessy (LVMUY) is up more than 10 percent in China, says Wendy Trevisani, manager of the Thornburg International Value Fund (TGVAX). Forty percent to 50 percent of the $20 billion fund is European-based, excluding the United Kingdom.
China is a desirable end-market these days not only because of its burgeoning middle class, hungry for wines, leather goods, watches, and jewelry and cosmetics, but because its currency’s tie to the U.S. dollar makes for relatively low currency volatility and more predictable revenues.
Health-Care Picks
Health-care companies also have broad exposure to still-robust foreign markets. Trevisani recommends Novo Nordisk (NVO), a global manufacturer of diabetes treatments and hormone replacement therapy that’s based in Denmark. The company generated 66 percent of its sales outside of Europe in the fourth quarter of 2009 and has leading market share in emerging markets and some dollar-based economies. She also likes Fresenius Medical Care (FMS), a manufacturer of dialysis products and services with clinics throughout the world.
Trevisani prefers to buy stocks on local European exchanges where there’s greater liquidity, but all of the stocks she buys have American depositary receipts on U.S. exchanges.
The market volatility of the last month has created “an opportunity to add to names we like, selectively, depending on how much stocks have sold off,” says Clas Olsson, senior portfolio manager of the $740 million Invesco European Growth Fund (AEDAX). “We’re bottom-up pickers, not macro guys,” he says. “We don’t know what’s going to happen to the euro or the European Union, [but] we tend to own companies that have earnings outside of the euro zone.”
Olsson likes companies leveraged to faster-growing economies, such as Brazil. Anheuser-Busch InBev (BUD) fits the bill, not only because it’s now run by Brazilians but for its significant exposure to emerging markets. He added BMW (BMW:GR) to his portfolio late last year not for the currency benefits that he clearly recognized but due to product innovation and the progress being made in restructuring the company.
Benefiting from a Weaker Euro
David Nadel, co-manager with Chuck Royce of the Royce European Smaller Companies Fund (RISCX), has been skeptical toward the euro—and paper currencies in general—for a long time and has been investing in European manufacturers whose exports benefit from a weaker euro. It’s a mistake to view these companies as Europe-centric, he believes, since so little of their sales come from Europe. He also likes precious metals producers, which benefit from weak currencies, inflation concerns, and weak faith in governments.
One reason that European stocks are under so much pressure is that investors have yet to see proof of higher exports on the back of the euro, which began to weaken after first-quarter financial results had been reported. Once second-quarter earnings come out, the market will be able to distinguish well-positioned exporters from companies that aren’t getting a lift and shares of the former group should begin to appreciate, says Nadel.
While some fund managers are trusting only large blue chips, Nadel sees the European market as especially attractive due to the lack of a long-term commitment among portfolio managers there to small-cap stocks. That’s in contrast to the U.S. where the Russell 2000 index and a small army of disciplined fund managers who focus on small-caps ensure demand for lesser-known stocks. “In Europe, most fund managers are multi-cap and they tend to use small-caps only for [market momentum],” he says. “When things turn sour, they race out of small-caps, which causes a lot of volatility and that creates opportunities for us” to buy stocks at big discounts. During the 2008 market sell-off, European small-caps were hurt much more than U.S. small-caps because of the lack of support from disciplined investors, he adds.
Nadel likes manufacturers with long operating histories that have survived multiple business cycles and have strong management teams. He prefers them to investing directly in emerging economies where companies have much shorter operating track records. His picks include Semperit (SEW:GR), an Austrian manufacturer of specialized rubber products like handrails on escalators and on moving sidewalks in airports whose sales are being driven by infrastructure spending in developing economies. He also likes Mayr-Melnhof Karton (MYM:GR), a leading maker of recycled carton board used in cereal boxes and cigarette packaging, much of whose sales are in the Middle East and North Africa.
Wary of Most Financials
T. Rowe Price’s Tenerelli also feels more comfortable buying shares of companies that are exposed to the industrial cycle and world GDP growth, and that sell into emerging markets and the U.S. He’s still wary of most financial stocks, even though he concedes that many may be temporarily oversold and due for a bounce. Any GDP downgrades will have an adverse impact on banks, which are geared to GDP growth, he says.
