Greece’s dance with default and economic depression, highlighted by its failure Tuesday to make a scheduled payment to international creditors, has been disrupting global stock markets for weeks—and nowhere more so than in Europe, where the MSCI Europe stock index has fallen about 5% over the past week through Tuesday’s close.
But some money managers think this is short-term noise that is obscuring a broader, longer term improvement in the continent’s economy, and creating buying opportunities in European stocks whose underlying businesses are strong enough to be Grexit-proof.
These days, “global” managers—who can invest in stocks anywhere in the world—are focusing on companies that can withstand Europe’s geopolitical dysfunction. Bernard Horn, whose firm manages $6.2 billion, including the Polaris Global Value Fund, has taken advantage of swoons generated by sour headlines about Greece and Ukraine to buy more stock in companies such as French tire company Michelin (MGDDF), German chemical maker Lanxess (LNXSF), and Norwegian fertilizer producer Yara (YARIY)—all of which have also benefited from lower oil prices. Horn has welcomed the market dips created by the Greek crisis because they’ve allowed him to get more shares at a discount. “I don’t know how such a small population can affect so much value in an economy, but it’s definitely happening,” says Horn.
Until recently, the endless brinkmanship over Greece’s bailout had been a factor chasing Scott Berg, manager of T. Rowe Price’s $4.3 billion Global Growth Stock strategy, away from European stocks—a contentious call for a globe-trotting investor who spends at least a week each month doing due diligence in Europe. But late last year, Berg started seeing encouraging signs across the pond. Companies were reporting unexpectedly high profits, and economists were forecasting that Europe’s GDP would grow with “a lot more acceleration than anywhere else,” Berg says. Berg took 9% of his fund’s assets out of the U.S. and plunged into Europe, buying stocks including Spanish bank BBVA (BBVA), French real estate firm Gecina (GECFF), and Danish drugmaker Novo Nordisk (NVO).
Those moves began to pay off in January, when Mario Draghi and the European Central Bank announced a vast monetary stimulus program, sending eurozone stocks on a tear. Berg’s portfolio is up more than 5% year to date—actually rising on Tuesday, even as European markets reeled. “It was like seeing a river card come up in Texas hold ’em,” Berg recalls. “When it comes, you’re like, ‘Yes! It is a flush!’”
After years of underperformance—and even after retreating during the Greek turmoil of the last few days—the MSCI Europe index has returned more than 4% in the first half of the year in dollar terms, far outperforming the major U.S. indexes over that stretch. Ben Inker, co-head of asset allocation for $118 billion investment firm GMO, pays Europe’s equity market a back-handed compliment: “It’s still on the ugly side, but it’s not as ugly as it was.” Money managers are increasingly confident that problem children like Greece, Spain, and Italy won’t sabotage the continent’s stronger economies, though threats of a “Grexit” from the euro continue roil the markets in the short term. “Even if you believe like I do that Greece really doesn’t matter for the whole eurozone recovery, it may act like it does,” says Steven Wieting, global chief investment strategist for Citi Private Bank.
One of the biggest side effects of Europe’s new monetary policy—an even weaker euro—is boosting revenue for many companies by making their exports more competitive. And at a time when U.S. stock valuations make some investors queasy, Europe looked inexpensive even before the Athens-induced slide. Collectively, the stocks in the MSCI Europe index are currently 33% cheaper by price-to-book ratios (and 9% cheaper by price-to-earnings ratios) than those in the S&P 500, and their dividend yields are 67% higher.
Still, there’s good reason for American investors to be wary. European stocks have not risen as fast as the euro has fallen against the dollar, effectively washing out many U.S. investors’ returns. (This year’s 4% gain in European stocks, for example, is a 13% gain in euro terms.) But bulls argue that the currency gap benefits anyone with a long-term investing horizon. “It actually makes international investing cheaper” by enabling dollar-wielding buyers to get more shares for their buck, notes Kate Warne, investment strategist for $897 billion advisory Edward Jones. Assuming the euro eventually recovers, she adds, owners of European stocks will get a bonus from the currency’s rise on top of share price appreciation.
Other investors, from BlackRock to T. Rowe Price, are confronting currency risk by hedging their portfolios. Retail investors have also jumped on that trend by buying hedged Europe ETF products: WisdomTree Europe Hedged Equity, for example, has expanded tenfold to $20 billion in total assets as investors poured in a staggering $14 billion in new money since the start of the year, through June 26. But some pros warn that hedging itself can sometimes backfire on investors if currency-value trends suddenly change direction, canceling out the benefits or even accentuating losses. “In this environment, you could have both the equity market and the currency market go against you at the same time,” says Wieting, who still advocates at least partial hedging.
Eric Sappenfield, portfolio manager of the $5 billion MainStay Epoch Global Equity Yield Fund, has been gravitating to Germany, buying high-dividend payers like reinsurer Munich Re (MURGY) (yield of 4.9%) and Mercedes-Benz parent Daimler (DDAIY) (3%). But venturing into Europe’s troubled periphery has rewarded him with other gems. Even when faced with higher taxes in recent years under an austerity program, Italian utility Terna (TEZNY) refused to cut its dividend (now 5.1%). Sappenfield’s reaction to that stability could be a mantra for Europe investors: “We held on to it even though everyone else ran away.”
