“From a micro standpoint, Europe presents one of the best shorting opportunities I’ve seen in the past 10 years in terms of valuations and negative momentum,” he said. He wasn’t talking about the large multi-nationals such as Unilever or Nestlé, but more about companies that operate regionally and are more susceptible to another Brexit scenario or other bad news.
“Europe hasn’t done a good job cleaning up after the financial crisis,” de Silva said. “There’s a lot of overhang that needs to be cleaned up.”
de Silva’s fund is levered on the short side. From a sector standpoint, he has a big underweight in financials and a big overweight in consumer staples. And he says he has a pretty strong tilt towards North America because that’s where the greatest earnings stability is.
“It’s hard to build a value-tilted portfolio now, which is why I think there’s a lot of opportunity on the short side,” he said.
Regarding Europe, Motamed smells a European banking crisis brewing on the horizon that could be triggered by future European elections that pull the E.U. apart and/or from troubled European banks that suffer major problems and bring down others in a contagion effect.
And then there’s Brexit. Rosenberg believes there will be so many legal obstacles to carrying out Brexit—i.e., myriad treaty renegotiations and the like—that it could drag out for years. He’s skeptical the U.K. will pull off a pure exit from the E.U.
“It’s the overhang and uncertainty of Brexit, along with concerns over bank capital structures, immigrations problems and political uncertainty . . . Europe will remain a drag on global growth as far as the eye can see,” Rosenberg said. “I don’t see what the upside is. If you’d ask me what are the things in the world that are at the top of my worry list, Europe is at the very top.”
On the positive side, Rosenberg likes two countries from the Bric complex.
“India is the world’s seventh-largest economy, and will be the third-largest in the next 10 years,” he said. “You have to look at India as where China was 20 years ago. There are some liquidity issues, but they do have the best demographics, and they’ll be a source of global growth for at least the next decade.
Brazil, where the Bovespa is up 30 percent this year, “is a real turnaround story,” he added. “When you look at emerging markets, it’s what’s happening to their balance of payments [that’s key] because that’s what caused their crisis to begin with. And Brazil's current account deficit is melting, so they remain a good turnaround story.”