Portfolio Managers: Europe is a bargain

Never count Europe out. It has a long industrial heritage and despite its troubles it still makes up 25% of the world’s economy powered by corporations more than able to withstand the stress of the sovereign debt crisis and the remnants of the 2008 subprime mess.

Canada’s European portfolio managers are sifting through rubble and finding extreme value in established, cash strong, quality companies that have taken a licking on the stock market.

“There are companies with little to no exposure to the sovereign debt crisis that are trading at multiples we have not seen for a very long time,” says Ian Scullion, vice-president of CIBC Asset Management and leader of EAFE Equity team.

To a seasoned investment pro like Scullion, who has spent more than two decades as a financial analyst and portfolio manager, it feels like the sale of a lifetime.

He’s been topping up on some companies and adding new ones that were previously too expensive. Companies like Germany’s Allianz and Axa based in France – two giant insurance companies with a global focus.

“These are key companies that have been beaten down by the markets but they have lots of cash and growth potential from their investment outside Europe,” says Scullion.

“A quarter to 35% of Allianz’s earnings comes from emerging markets,” says Scullion. “Its overall exposure to the so-called PIGS is insignificant. Even if Greece defaults on its sovereign debt the impact might be 3 to 4%.”

“We can buy very strong financials at very decent prices,” he says, “and we think over the next 3 to 5 years we are going to make a lot of money out of these stories.”

Simone Loke, portfolio manager with TD European Growth Fund, believes the worst of the European crisis is over.

“From here on, the EU is moving ahead in terms of structural reform,” she says, “and the picture is an optimistic one.” Although she admits, “There is some risk of slippage”.

When Loke took over as portfolio manager of TD European Growth Fund five years ago it was ranked in the 4th quartile. It is now ranked in the 2nd quartile and Loke sees the European crisis as an opportunity to improve performance again.

Europe may be going through some excruciating economic conditions but Loke sees value going long in strong, established companies with established track records, exposure to emerging markets, high quality growth and cash – lots of cash.

“Nestle, based in Switzerland, is among our top ten,” says Loke. “Its business model is proven in terms of how it operates and generates cash.”

Although wary of many of the financials, Loke likes the UK Standard Charter Bank.

“It is UK based and managed from London, but most of its exposure is in the emerging markets,” she says. She likes Siemens and Philips as well. Both companies are well over one hundred years old, generate gobs of cash and are well positioned in the global market.

Investors stampeded out of European stocks like a herd of wildebeests when the debt crisis began.

Loke says some perspective is in order and dismisses the concerns about contagion saying “the problem is actually confined to peripheral countries and is equal to less than 14% of GDP of the Eurozone”.

“The size of Germany’s GDP is 50% more than the 4 peripheral countries added together and Germany and France added together is over 2.5 times the size of the 4 peripherals added together in terms of GDP,” she says.

The market volatility is due to hedge fund activity that CIBC’s Scullion calls “gambling in the market”.

“My job is to be in it for the long-term,” he says. “When you invest in a global company long-term – you will make money.”

The slide in the Euro, although perceived as a negative, is actually helping the big engines of the European economy like Germany and France according to TD’s Loke.

Scullion doesn’t lose sleep over the Euro either. He says he’s learned not to try to predict currency markets. “I just know these stocks are 25% cheaper than they were,” he says. “And I have never been as excited as I am today about being able to offer value to my clients,” he says from his office in Montreal.

“For us, the best thing is a crisis, kicking the market, bringing down quality companies that are not operationally affected by what’s going on,” says Scullion.