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Talking Points: Consensus on Europe Elusive

What Morningstar analysts are hearing about Europe’s condition.

Morningstar Analysts, 11/30/2011

The Issues
European markets have been hurt by a plethora of negative developments in recent months. Heightened concerns about the sovereign debt levels in several nations on the periphery of the region have taken their toll, as have fresh fears about the health of several economies at the area’s core. And after a strong first four months of 2011, the MSCI Europe Index has plunged since then and is down 21.8% for the year to date through Oct. 4.

Periods with sharp market declines and considerable pessimism often create bargains, so it comes as no surprise that many foreign large-value managers have scooped up what they see as great deals recently. Meanwhile, a region with hundreds of large companies will always contain a good number that have strong long-term prospects and fundamentals, so it makes sense that many foreign largegrowth skippers have found what they consider to be superior growers at fetching prices.

However, a good number of international-stock managers disagree, arguing that the overall opportunity set in Europe is not that compelling. There is one area of general agreement, hough: Most international-stock managers believe that the vast majority of European banks aren’t very appealing at present.

The Points
Europe dominates the investment universe of foreign large-cap managers. The typical foreign large-value fund has 62% of its assets in Europe, while the average foreign largegrowth fund has 57% of its assets in the region.

Artisan International Value ARTKX is one of several prominent foreign funds that has added significantly to its European exposure in 2011. Managers David Samra and Dan O’Keefe recently noted that though growth in the developed world may be slowing, they’ve continued to find attractive values, particularly in Europe.

Harding Loevner International HLMIX has a bit more Europe exposure than the foreign large-growth norm. Alec Walsh, who comanages with Ferrill Roll, noted that their European holdings make products with highly resilient demand characteristics or have ample exposure to fast-growing emerging markets (like luxury-goods maker LVMH). He believes turmoil in European financial markets will have negligible impact on their businesses and that such turmoil could cause share-price volatility, which would offer an opportunity for the fund.

Some world-stock and world-allocation managers are wary of the region. Dennis Stattman, who runs BlackRock Global Allocation MDLOX, recently pointed out that he and his team are cautious on Europe because of continuing sovereign debt problems, concerns over banks’ exposure to peripheral debt, and a weak outlook for economic growth.

“A common denominator to our European holdings is that they are overwhelmingly characterized by the multinational dimensions of their business franchise; these companies, from the largest down to the smallest ones, have a highly diversified stream of revenues, both by geography and by currency.”
Ferrill Roll
Harding Loevner International Equity HLMIX

“In the U.K., disclosure is good; it’s relatively more entrepreneurial compared with the rest of Europe, and valuations can be attractive. There are niches of really fast growth, and the combination of ‘emerging markets love’ and the potential European debt/austerity/currency crisis has created clear opportunities.”
Alex Motola
Thornburg International Growth TIGAX

“We feel the European Union, out of necessity, will force tough austerity measures on its member countries and their banks. Odds are these actions will produce an extended period of very slow economic growth. The industries where we find the least number of attractively valued stocks (telecom, utilities, retail, services, banking, real estate, and building) represent 41% of the European index. These industries are heavily tied to Europe’s local economy, so will likely suffer more than companies in other industries that are globally diversified.” 
Thomas S. White Jr.
Thomas White International TWWDX


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