From the way international equity investors have behaved, Europe has become as unattractive a destination as leprosy-plagued Molokai Island in a Jack London story.
“But it’s easy to avoid investing in companies that are exposed to Europe’s peripheral problems,” argues John Simpson, Boston-based portfolio manager at boutique Oechsle Investment Advisors. “And Germany, the Netherlands, Austria and even France are experiencing rapid economic growth.”
He argues that for all the hoopla around emerging markets, investors have blinded themselves to the fact that European multinationals are often the biggest beneficiaries of that growth – and their valuations are attractive, in part because of the stigma from eurozone sovereign debt problems.
Oechsle’s mandate is to invest in developed-market equities outside of the United States, so naturally it has large positions in Europe. But its strategy there has evolved to one that is focused on exploiting European companies’ businesses in emerging markets.
“Investing in German exporters is as much about China as it is about local assets,” Simpson notes. Inflationary pressures in Asia create the biggest uncertainty for this year, and he admits his colleagues are divided on whether this heralds a soft landing or an overreaction among Asian central banks. The answer will determine what kind of rotation in the portfolio makes the most sense.
But he is sanguine about jitters over the euro. Its weakness is a boon to exporters such as software company SAP and electronics manufacturer Siemens. Simpson says the euro will endure this crisis and ultimately be affirmed as a strong, sound unit.
Investors spooked by sideshows in Greece and Ireland are missing the fact that northern European exporters’ order books are full. Simpson expects these stocks to enjoy improved earnings.
German companies are particularly attractive, he says, because domestic demand is on an upswing, there has been no local real-estate crisis, and low interest rates make financing attractive.
“Households are now leveraging their balance sheets,” Simpson says.
He is bullish on the major eurozone countries, both from the macro side as well as looking at corporate balance sheets.
The exception is the United Kingdom, where austerity and deleveraging is the rule, and there are relatively few world-class exporters. However, it’s possible that today’s unappealing environment could yield benefits down the road for investors in Britain: “Austerity today could be setting up a positive investment case for the UK next year,” Simpson says.
