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BNP Paribas On How Wealthy Asian Investors Are Giving European Stocks A Closer Look
Christian Bucaro
BNP Paribas Investment Partners
22 November 2013
After turning their backs on European equities for years, Asian high net worth investors are starting to show some interest. “We’ve been highlighting European equities which we feel are attractively valued and being unfairly punished by the European debt crisis. Asian distributors hardly ever followed up on our meetings but in the last couple of months, there’s been a lot more feedback and more action. High net worth investors are starting to realise that there’s interesting value in European equities,” Christian Bucaro, head of distribution, South East Asia at BNP Paribas Investment Partners, said in recent comments sent to this publication. Investors in Japan, often on the forefront, were among the first to pick up on the trend while private banks in Singapore and Hong Kong are also showing interest, he said. Though inflows aren’t “massive” the change of heart marks something of a historic change for Asian investors, who have generally preferred to keep their holdings closer to home. Investors have looked outside the region tended to focus on the US. Asian investors haven’t been the only ones who are looking for alternatives. Last month, American investors pumped more money into European equities than anytime since 1977, with pension funds and other institutional investors investing $65 billion into European stocks in the first six months of 2013 (source: Goldman Sachs). Unfairly Punished The increasing interest in Europe comes on the back of a rally in US stock markets and concerns about the US debt ceiling. The Dow Jones Industrial has risen more than 20 per cent while the Nasdaq is up over 30 per cent year to-date, pushing some investors to take profits. Meanwhile, even though US lawmakers narrowly avoided a debt default by agreeing to lift the debt ceiling at the last minute, the political in-fighting, which led to a shutdown of the US government in October, has been a source of worry, pushing investors to seek alternatives outside the US. At the same time, the European economies appear to be improving and are now showing signs of recovery. The risk of the eurozone collapsing has more or less disappeared – a sentiment reflected in narrowing sovereign bond yields. Last quarter, European economies showed signs of growth. Significantly, The European Central Bank has managed to jump-start European economies without ballooning debt, as in the US and Japan and European government austerity plans are starting to pay with several countries reducing their deficits over the last four to five years. European equities are looking quite attractive, now trading at a 41 per cent discount to US equities and 27 per cent discount to the historic average. While the US S&P index has risen 12.1 per cent since the start of the global financial crisis, the MSCI Europe Index has dropped 25 per cent. European companies have been unfairly punished because they happen to be domiciled in Europe. But the fact is that many European companies are actually multi-national and have diversified exposure to many parts of the world. “It’s a debt crisis, not an equity crisis. It’s about government debt and that is something different from European equities and European companies which have been improving their balance sheets and piling up quite a bit of cash,” Bucaro said in his commentary. Many European companies actually have very limited exposure to Europe and the debt crisis. European companies derive, on average, less than 50 per cent of revenue from Europe, another 33 per cent from emerging markets and 18 per cent from the US By comparison, US companies derive about 70 per cent of revenue from the US, Japanese companies get about 71 per cent of revenues from the domestic market and emerging market companies get about 76 per cent of revenues from around the region. “It’s quite an eye opener,” said Bucaro, when managers give examples of big, international companies that happen to be Europe-based, citing names such as Mercedes Benz or Louis Vuitton or Swatch. Sectors to Watch BNPP IP takes a contrarian approach when buying European stocks, favoring companies that are overlooked or out of favor. Not all sectors are attractive. Some sectors, such as food and beverage, chemicals, health care, and personal & household goods, are fairly expensive. Sectors that look attractive and offer good value currently include financials, utilities and electricity companies and telecom companies. European banks are now attractively valued, with an average price to earnings ratio of 0.88 times - a 53 per cent discount to the historical average of 1.87 times. Shares of Spanish banks, for instance, have been severely hit because of concern about the Spanish economy and debt. But banks such as Banco Santander, which is one of the largest banks in Europe, actually have significant exposure to Latin America and limited exposure to Spain. Nonetheless, shares of Spanish banks have been pummeled along with other Spanish companies with very different outlooks, he added.