European financial companies remain underrepresented in many international fund portfolios, reflecting the belief that many institutions remain overleveraged.
At the Thornburg International Value Fund, for example, manager Lei Wang sold his fund's holdings of AXA, the largest insurance company in France, and redeployed the assets into China Life, China's largest insurance company. "We believe China Life's balance sheet should be in relatively better shape than AXA's, which might become vulnerable to the uncertainty of European credit repricing," Wang says.
Financials will remain a dubious sector until public officials offer a clearer vision of how to solve the debt crisis, managers say.
"The amount of debt that is outstanding in much of the developed world is too much for the income available to service it," says Deshpande at First Eagle Funds. "As long as the authorities fail to encourage a recognition of the overindebtedness of society, then there remains a great deal of risk in various credit institutions."
Among the companies he feels will benefit from the current crisis are Daimler AG, the German manufacturer of Mercedes-Benz automobiles. Two-thirds of the company's business is outside Europe and Deshpande feels the weaker euro will give it a competitive advantage against Asian auto exporters.
He also likes HeidelbergCement, a German cement and building material manufacturer that depends on exports for 75% of its business. The lower value of the euro should enable the company to win a large share of the U.S. infrastructure program-part of the stimulus package approved by Congress in 2009-that is just now starting to enter the contract-procurement phase.
Some managers note that even European companies with global markets continue to face risks. If the U.S. dollar were to fall in value for some reason, for example, these companies could face the double whammy of a recession at home and an expensive euro abroad. Joe Portera, manager of the Hartford Strategic Income Fund, notes that even Germany, viewed as one country that can keep the euro zone whole, has a lot riding on countries like Greece, Spain and Portugal because 40% of its exports are to other EU members. "A large chunk of the German export market may be in distress the next couple of years," Portera says.
At the same time, he feels a double-dip global recession, similar to the one started by the U.S. debt implosion in 2008, remains a long shot. "The difference between now and when Lehman [Brothers] blew up is that there was a lot more leverage in the system back then," he says. "You're not hearing the anecdotal whispers about funds getting margin calls or wholesale selling of assets."
Kaplan agrees, saying that she considers the breakup of the euro zone to be an outsized fear. Too many countries in Europe have too much riding on the success of the euro, she says.
"I see Greece departing the euro zone the same way I see California departing the U.S.," she says.