Sunday Briefing: Are European Stocks a Bargain?
There seems to be a growing consensus that, notwithstanding Europe’s well-documented troubles, the region’s stock markets have become so beaten down that they may now be a real bargain. All other things being equal, the more equity prices get pushed down, the higher the expected return on a forward-looking basis. This is not to deny the reality of all that bad news, just to say that at some point the bad news gets “priced in” and higher returns can be expected.
This shift in sentiment has been emerging in many venues. Two weeks ago, the Economist suggested that we may have arrived at a “Contrarian Moment,” with European shares priced for higher returns. The Economist notes a phenomenon we’ve discussed before: a low-growth economy does not equal a low-return stock market.
What’s more, the work of Elroy Dimson, Paul Marsh and Mike Staunton of the London Business School has shown there is no statistical link between one year’s economic growth and the next year’s stockmarket returns. For the period from 1972 to 2009, the trio ranked 83 countries by their GDP growth over the previous five years. Investors who backed the slow-growth countries earned better returns than those backing the high-growth group.
An article in today’s New York Times, meanwhile, suggests that “When All Looks Bleak, Maybe It’s Time to Invest.” Among other things, the author notes the growing consensus among fund managers that European equities may now be a bargain.
This is actually a widely held view, according to a BofA Merrill Lynch Global Research survey, conducted from May 31 to June 7 and involving 260 fund managers. Europe is the most undervalued region in the world, managers said in that survey — but the question is what should be done about it.
Of course, contrarian investing is, by its very nature, “contrary” to our visceral reactions, as the article notes.
But if you’re concerned primarily about the next six months, and you’re not willing to risk losing much capital, plunging deeply into European stocks may be the last thing you want to do.
That, of course, is the challenge of contrarian investing. The idea is to buy when the market is low, and to sell when it’s high — a feat that requires excellent timing and strong convictions.
For Yeske Buie, this notion of “plunging deeply” into depressed markets smacks too much of market timing. We do, however, take advantage of valuation shifts through our disciplined rebalancing process, wherein funds are automatically shifted from those parts of the portfolio that have become relatively expensive to those that are relatively cheap.
Of course, today is a big day for the Euro-zone, with Greeks again going to the voting booth to choose a national government. Depending on the outcome, it may or may not be possible for the Greeks to remain part of the European monetary union. However, as Robert Skidelsky noted during a debate with Niall Ferguson on Fareed Zakaria’s Global Public Square (GPS), a Greek exit from the Euro need imply nothing for Spain and Italy, whose economies are much stronger and where fiscal problems are not nearly as dire.
During the “Super Trends” presentation that we discussed in our last TheLiveBigWay Digest, Dennis Stearns observed: “the growth of the Chinese economy alone adds a new Greece every three months.”