Looking for bargains in Europe? Think global, not local

Share

It's a good time to buy European stocks – as long as they aren't too European.

Growing concern that governments from Greece to Italy may default on their debt has hammered the continent's equities. The benchmark MSCI Europe Index is down 16.4 per cent since the start of the year and is trading at a mere 10.4 times earnings, near its lowest level in 15 years.

Many of the euro zone's largest companies are now far cheaper than their North American counterparts. It's easy to find blue-chip firms paying dividend yields in excess of 4 per cent and trading at single-digit price-to-earnings ratios.

Some of the discounted firms – notably French and German banks – appear to deserve their bargain-basement pricing because of their perceived liabilities in case of a Greek default. However, several of the continent's best known enterprises present attractive buying opportunities because they have limited exposure to the sovereign debt crisis while serving markets that reach well beyond the euro zone, money managers say.

"There is tremendous opportunity in Europe, but you have to be highly careful where you invest," said Vontobel Asset Management Inc.'s Matthew Benkendorf, who oversees the $290-million BMO European Fund. "Would I buy European companies that have been beaten down? Absolutely. I wouldn't go buy a whole portfolio just exposed to doing business in Europe. I want to find those European companies that are global."

Consider Vodafone Group PLC , a British-based operator of mobile-phone networks from Australia to China. It now trades for just 10.6 times earnings with an estimated dividend yield of more than 8 per cent.

Novartis AG , a Swiss drug maker that generates almost two-thirds of its sales outside Europe, has a dividend yield of 4.6 per cent.

Nestlé SA, the Swiss maker of Kit Kat candy bars, Perrier mineral water and Gerber baby food that gets more than 80 per cent of its operating income from outside Europe, has tumbled 11 per cent this year, bringing its dividend yield to 4.6 per cent. (Read more here on the investing case for and against Nestlé)

"You find more bargains in situations like this than you otherwise do," said Toronto-based Don Reed, who took over management of Franklin Resources Inc.'s Templeton International Stock Fund from Sir John Templeton more than 20 years ago. "I don't believe in going in and buying the European market, but if I can find good world-class companies in Europe that are reasonably priced, then those are the kinds of companies that I want to populate the portfolio that I manage."

To be sure, some managers are more focused on Europe's risks. Vincent Lépine, a Montreal-based economic strategist with CIBC Global Asset Management Inc., sees opportunities for investors to edge into the German stock market, but suggests they limit their exposure.

"In the long run, you're better off with Canadian equities, emerging equities and, at the margin, U.S. equities, than European ones because of the structural problems [in Europe]" Mr. Lépine said.

Templeton and Vontobel aim to pick companies that operate in fast-growing countries or in niche markets where they have an advantage. While that strategy hasn't shielded their holdings from declines, they hope it will help them avoid the worst in case of a Greek default or an economic slowdown in Europe. They've been buying the likes of Nestlé, British American Tobacco PLC , Novartis and Telenor ASA, a Norwegian phone company that gets about 70 per cent of its revenue from Scandinavia, Eastern Europe and Asia.

"You want global businesses, you want businesses clearly that have a proportion of their revenue coming from growth markets," Mr. Benkendorf said.