What a difference a year makes! Early in 2012, the eurozone appeared to be on life support and market prognosticators were busy weighing the odds of a breakup. At the time, the proposition that European stocks would actually post a positive performance for the year seemed almost absurd, but of course that’s just the sort of fertile environment value-hunters such as Philippe Brugere-Trelat like. Brugere-Trelat, EVP of Mutual Series and portfolio manager of Mutual European Fund and Mutual International Fund, found select opportunities in Europe that were ripe for the picking. While the debt crisis in Europe is far from over, he thinks the picture looks brighter for Europe this year.
The Power of Policy (Statements)
In the summer of 2012, European Central Bank (ECB) leader Mario Draghi reassured the market it was committed to saving the euro. And in September, action followed words as the ECB announced it would make “unlimited” (albeit conditional) purchases of government bonds in the secondary markets to support cash-strapped nations whose bond markets had suffered severe blows. The program, officially known as “Outright Monetary Transactions,” aimed to preserve the singleness of monetary policy. An epic euro fail was avoided. One might even say the market’s euphoric reaction deemed the ECB’s efforts an epic success, says Brugere-Trelat.
Philippe Brugere-Trelat
“There’s no doubt that Europe is in a much better situation than a year ago. Since last summer, there’s been a significant and positive change in the way investors look at Europe and the eurozone in particular. The huge risk premium which previously had been demanded by equity investors has diminished significantly.What’s interesting is that it took just a statement by the president of the ECB last July to declare that it would do ‘whatever it takes’ to save the euro. That was enough to reassure the markets. What’s also interesting is that the ECB didn’t have to spend a cent, but the confidence was restored and the specter of default by a country was removed. That led to a strong rally in the equity markets.
“But I’m also aware that this rally is waiting for a pause because it’s been driven mostly by the relief, the realization that Europe was not going to fall off the precipice. Now what appears necessary for that rally to be sustained is a clearer and more confident outlook for earnings. And I think this year and next year could provide some positive surprises. Why? Because first of all Europe is a very open economy. Second, labor costs have been going down in Europe and that is supportive of margins going forward.”
Don’t Give the All-Clear Just Yet
That doesn’t mean it’s all clear skies and smooth sailing for Europe, however. Brugere-Trelat cautions:
“The crisis is far from over. I think there are a number of issues which remain. First and foremost, the region’s economic growth prospects remain mediocre at best. And number two, there are a number of structural reforms which still need to be agreed upon and implemented, such as closer coordination of fiscal policies or the implementation of European-wide banking supervision. What seems clear to us is that the markets will keep the pressure on the politicians; the ECB’s actions have given politicians time, but they still have to pull their act together. But, on the whole, I’m fairly positive and happy about the way the markets have been behaving recently.”
Plucking European Values
Given all the gloom and Eurozone doomsday scenarios, many investors fled Europe last year, even from countries which were not in immediate financial peril. Meanwhile, Brugere-Trelat was on the hunt for values—one of which he found in Denmark:
“A.P. Moeller-Maersk.1, a very large industrial conglomerate and the largest shipping company in the world, was a typical example of us being contrarian, being patient, and at the same time being very close to management and making sure that management is executing on its plans. What’s interesting is that Maersk is also a very large oil and gas company, and also a very large food retailer in northern Europe. It had been trading at a discount to book value, and with us everything starts with valuation. We felt this was a very cheap company with good management. We are stock pickers. We do not invest based on our like or dislike of a particular country or a particular sector. What we are looking for are companies with a good competitive position, good financials, that for one reason or another have been unjustly punished by the market. “
1. As of December 31, 2012, Mutual Series held the following in A.P. Moeller-Maersk as a percentage of total net assets: Mutual European Fund: 3.25%; Mutual International Fund: 1.13%. Holdings are subject to change
© Franklin Templeton
© Franklin Templeton Investments
