European equities: Time for domestically focused firms , says Franklin Mutual Advisers’ Dudley
Katrina Dudley, portfolio manager at Franklin Mutual Advisers, assesses investment opportunities in Europe.
As Europe’s actions toward addressing its sovereign debt crisis evolve, so may the investment opportunities within the region. Politicians around Europe seem increasingly aware that austerity alone cannot solve the region’s debt crisis and that a healthier level of economic growth is necessary. Any meaningful transition away from harsh austerity measures would, we think, bode well for Europe’s more domestically oriented companies. We have begun to find such companies with attractive risk/reward profiles and, from our perspective, the characteristics of these businesses make a European-focused mutual fund optimal for an investor to gain exposure to this opportunity.
Comments by a growing number of eurozone leaders, as well as the European Commission’s recommendations in May to give some countries more time to complete austerity plans, reflect new flexibility for Europe’s politicians. We believe the austerity measures of recent years have been necessary, but the singular focus on reducing government outlays has been at the expense of policies to support an economic recovery to help lower unemployment, boost consumer spending and increase tax revenues. In a region where politicians and policies tend to move slowly, the recent rhetoric and policy moves were generally viewed as a first step toward possible pro-growth measures. We also believe that earlier regulatory reforms, such as those enacted in Italy, Spain and other peripheral countries, have significantly reduced red tape, which we think should make it easier for companies to do business and offer a tailwind to these “pro-growth” investments.
The change of view within Europe may prove to be favourable for the Mutual Series strategy. Under the strict austerity measures, we found the best investment opportunities across Europe were among the region’s multi-national exporters. These businesses were predominantly based in Northern Europe with significant exposure outside the continent, particularly to North America and Asia. As deep-value investors, we found this cross-section of companies to be particularly compelling since they appeared to us to be unduly penalised by investors for being headquartered in Europe, despite strong growth and healthy balance sheets. This strategy has largely paid off over the past couple years but has also begun to show signs of playing out among a few of the companies in which we invested. From a valuation viewpoint, many of the stocks experienced significant re-ratings as other investors seemingly caught up to our investment views.
We are now beginning to see better risk/reward profiles among companies that generate most of their revenues within Europe. We believe these companies are likely to benefit significantly from any economic improvements across the continent. When compared to other developed markets, Europe looks more attractive to us on a price-to-earnings, a price-to-cash-flow and a dividend-yield basis. However, among domestically oriented companies to which we have been paying close attention, valuations, in our view, have been generally more attractive than, or valued in line with, the overall market.
These are the moments when we view active management as having a distinct advantage over more passive methods. The potential opportunities among domestically oriented companies are generally quite diffuse and typically involve companies that are smaller than European multinationals. Indeed, we have been finding what we view as attractive opportunities among mid-capitalisation stocks. With our valuation discipline, intensive research process and on-the-ground investment professionals, we are able to identify, analyse and invest in these opportunities.