If there's any investing trend to be gleaned from Europe, it seems to be this: Invest in multinational companies with a strong global footprint. "If you choose the right pockets of Europe, you have increased exposure to emerging markets," says Robert Quinn, Standard & Poor's European equity strategist. "And the best sectors for that are consumer staples and energy."
Quinn also favors the automobile and consumer durable industries within the discretionary sector, along with electrical equipment among industrials. S&P's list of "preferred" companies includes ABB, Alstom, Nestlé and Sanofi-Aventis, along with such names as the British aerospace and defense company BAE Systems, French luxury goods purveyor LVMH, and Anglo-Dutch consumer products giant Unilever.
Hare, Not Tortoise
European equities, like those in most global equity markets, have been feeling the love since the early-March lows. As of Sept. 15, the Dow Jones Stoxx 600 European Index gained 22.6%.
But some people wonder if the European markets have got ahead of themselves. Quinn believes that market sentiment will be tested by third-quarter results from banks, as well as by some nonfinancials that have benefited from share price gains based on less-worse-than-expected results. He's bullish on European equities over the next 12 months, regardless of any potential short-term hiccups.
The S&P's GDP forecast for the euro zone in 2009 calls for a contraction of 4.4%, followed by a 0.5% recovery in 2010. S&P's forecast for the U.S. is negative 2.9% in '09 and positive 1.5% in '10.
"The great thing about the U.S. is you have one country and decision-making administration versus a lot of different factors in Europe vying for a voice in policy-making," says Quinn, who's based in London.
ING's Martin Jansen says European stocks, particularly the global franchises with significant exposure to emerging markets, could be solid performers as long as they can contain--and ultimately lower--their operating costs.
"Western European companies are aggressive in outsourcing labor to Eastern Europe where the skilled workforce costs one-third to one-fourth less," Jansen says. "That was a big driver for Eastern Europe. But both its manufacturing and banking sectors have taken massive hits during the global economic downturn."
He says Eastern Europe is starting to look attractive, but within emerging markets he's more comfortable with countries such as Brazil and those in the Asia-Pacific region. "And at this point we're more comfortable with Western Europe than Eastern Europe because the latter has a big hole to dig out of."
"Long-term," Jansen says, "Europe is steady and stable, but it's not exciting."