The euro's fall and a current-account surplus are boosting Europe's position, while overall valuations and earnings potential are currently more attractive versus the U.S., says T. Rowe Price head of international equity Chris Alderson.
Jeremy Glaser: For Morningstar, I'm Jeremy Glaser.
I'm joined today by Chris Alderson, the head of international equity for T. Rowe Price. We're going to get his take on what's happening in Europe and also in emerging markets.
Chris, thank you for joining me today.
Chris Alderson: Jeremy, a big pleasure.
Glaser: Let's start with Europe. The European Central Bank is obviously trying very hard to jump-start the European economy. Are you seeing any signs that these programs and these kind of extraordinary measures are having an impact?
Alderson: We are. The European PMI this week jumped to a four-week high. We're seeing a pickup in bank lending. So there's definitely some evidence that things are happening. QE, in general, we can all debate whether it's been successful around the globe, and negative real interest rates. We live in extraordinary times. So we'll see.
Glaser: When you look at the European economies, do you think this is a temporary boost, and that when the ECB withdraws these programs, the fundamentals in terms of competitiveness won't be there? Or do you think this really can kick start long-term growth?
Alderson: We think Europe is pretty competitive these days. It's running a big current-account surplus, which helps. We think the euro's fall has helped tremendously. If I'm going skiing in Vale next week, a lift ticket in the states per day is $120. You could get the same lift ticket in the best ski resort in Europe for about half of that today. So I think Europe is definitely pretty competitive again.
Glaser: When you look at the investment landscape, then, do see a lot of opportunities in terms of valuations of European stocks, particularly compared to, say, U.S. equities?
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Alderson: We definitely do. Europe is about 3 multiple points cheaper than the U.S. is at present. The U.S. is on about 17 times earnings; Europe is on about 14. And you've also got earnings that are much more depressed. Earnings are about 25% lower in Europe than they were in 2007. They are about 25% higher than they were in 2007 in the U.S. So you've got the chance for 1) a rebound in terms of earnings, and 2) a multiple re-writing.
Glaser: Is that true across sectors and market caps? Are you seeing opportunities mainly in the big multinationals or in the companies that are more European-focused?
Alderson: I would say both. You've got opportunities in some turnaround growth companies. You've certainly got opportunities in some of the high-yielding stocks. Again, in an environment with incredibly low interest rates, you can still buy Spanish utility stocks with 6% or 7% dividend yields. So we think those will be very good stocks going forward in this environment.
Glaser: So we've been talking mainly the eurozone. When you look at emerging Europe, are you seeing any opportunity there?
Alderson: Well, emerging Europe is obviously dominated by Russia, and that's a completely separate issue. It's not really about economics; it's much more about politics and trying to get into the mind of President Putin and what he's doing. The Russian market looks very cheap optically, and you've got a lot of those state capitalist companies that clearly are cheap, like a Gazprom on 3 times earnings. But they're not working for you as a shareholder.
Now there are some very good private-sector companies in Russia, such as Magnit, the food retailer, which sells on about 18 times earnings. We like that stock. But, again, the whole environment--you have to hope that things aren't going get worse politically in Russia.
The rest of emerging Europe is just fine. Poland, we think looks OK. The growth is fine, but actually Western Europe has gained a lot of competitiveness against Eastern Europe, and we've seen things, for example, auto assemblers move out of Poland and the Czech Republic and relocate to Barcelona in Spain.
Glaser: Let's turn our view to China. That's another story where we've seen slowing growth. What's the right way to think about slowing growth in China? Is this a temporary dip or should we get used to much slower growth out of the country?
Alderson: In a lot of senses, the Chinese are trying to grow more slowly. I think the days of growing at 10% are over. I think we should expect 6%-7% growth going forward. Clearly, China is trying to re-orientate its economy from being an investment-led economy to being a consumption-led economy. I think that's all healthy.
What we're more concerned about is some of the debt levels in the country, and I think those might come back to bite them going forward.
Glaser: What does that mean from an investment standpoint in China? Has this slowdown created any opportunities? The stock market certainly is looking relatively high, at least on nominal levels, compared to where it's been?
Alderson: The Chinese A shares have had a good bounce in the last six to nine months or so, but the last five or six years has been in a big de-rating. The Chinese market was on 35 times earnings in '07; it's now on about 8 times earnings. We think the overall market looks like good value. But we are concerned, as I mentioned, about some of that debt. Private sector debt-to-GDP in China today is 200%. In the U.S., at the height of the financial crisis, it was 160%. And a lot of that debt is U.S.-dollar denominated. So if the renminbi were to weaken somewhat from here, we think that will put pressure on a lot private sector corporates.
Glaser: How does the impact of a slowing China change your investment thesis on other parts of emerging Asia? Do you worry about any knock-on effects hitting other opportunities you could be looking at?
Alderson: The rest of emerging Asia is not a homogeneous region. There are plenty of different opportunities there. India certainly, we think, looks attractive. The biggest concern for us would be if the renminbi started to depreciate a lot, because the rest of Asia has gained a lot of competitiveness in the recent past.
The other key transmission mechanism I would say would be on commodity prices. As China has got less investment as a percentage of GDP, that clearly puts pressure on commodity prices around the world. In general, that's been a plus for emerging Asia and a minus for other parts of the emerging world, such as emerging Europe and Latin America.
Glaser: Looking at India--it may be talked about less than China, but it's had some fantastic equity performance over the last let's year or so. What's driving that performance and do you think that there is still opportunity in that marketplace?
Alderson: We do. We really like Modi. He was a very successful regional governor. We think he is going to come in and do a lot of the same sorts of things nationally. He's got very big approval ratings, a good mandate for change. And the economy is growing pretty nicely. Real interest rates are still high in India, so the Reserve Bank of India has plenty of scope to cut rates.
But you've got to be careful in India because some of the big consumer stocks are unquestionably expensive. Hindustan Unilever, for example, sells on almost 50 times earnings--those nice, steady growth consumer names. So we prefer more of the cyclical turnaround stocks, like Maruti Suzuki, for example, the car company, on mid-to-late teens multiples with good earnings recovery potential.
Glaser: Chris, I really thank you this overview of the global markets today.
Alderson: My pleasure, Jeremy. Enjoyed it.
Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. Thanks for watching.
