Friday, October 24, 2014

Peripheral Europe On Sale. Follow The Smart Asian Money

European equity markets are in a funk.  The Euro is down some 8% vis-à-vis the USD and RMB over the last several months.  Most markets have given up their gains earlier this year and several are trading far below than where they were at the beginning of the year. The fall is particularly acute in several of Europe’s ‘peripheral’ markets of Greece, Portugal and Austria.  The Athens Composite Index is down 31% in the last six months alone.  

As at 20 Oct 2014
3 months (% chng)
YTD  (% chng)

Many in the financial community are projecting deflation, a third recession and a breakup of the Eurozone if not a breakup of the entire European Union.  

Even a European friend has turned bearish saying the cultural differences between the countries are just too difficult to overcome.  He believes that the people and culture of Germany, France and Italy - the three biggest countries in the EU - are just too different for the countries to stay together.  If this is the case, what about the Greeks, Poles and Portuguese?

However other native European friends – and many Asian ones – are looking at Europe and salivating at its cleaner air, cheaper prices and overall better standard of living compared to Hong Kong if not much of Asia. 

I don’t know for sure, but I suspect many of these worries are already reflected in equity prices, especially those that suffered the most during and since the 1998 global equity market meltdown. 

Except for similar demographics, the comparison to Japan doesn’t make sense.  Japanese equities traded at some of the world’s highest ever valuations in the late 1980s and early 1990s with PEs and CAPEs reaching into the 100s and 90s (see this website). 

In contrast ‘peripheral’ European countries such as Greece, Portugal and Austria have amongst the least expensive equity markets in the world based on several longer term valuation metrics.  

Other asset prices have also decreased.  Newspaper articles note that property prices are down some 30% in many European countries.  Several friends have recently bought or are thinking of buying property in various European countries.  

My opinion is of course colored by being located far away from the storm in Hong Kong. I’m not subject to the nightly news reports on unemployment, stagnation, and government ineptitude that must drag on sentiment.

In fact my more positive view is formed by seeing and hearing reports of Asian investors – mostly from China – taking advantage of low asset prices and investment friendly policies.  (See article here.)

One of the largest and highest profile foreign investors in Europe is Shanghai’s Fosun group which I wrote about in my 2011 book on Hong Kong and China conglomerates.

For those that don’t know, Fosun is one of the largest privately held conglomerates in Mainland China and likely the most active in raising equity capital.  It has stakes in over 15 listed companies and, through various PE funds, another 16. 

They are amongst the better investors having grown from its biotech roots, into a diversified conglomerate mostly through savvy investing.  The group’s co-founder and largest shareholder, Guo Guangchang has been compared to both Warren Buffet and Li Ka-shing, Asia’s richest person.  (Full Disclosure: I hold shares in a couple of the companies they’ve taken stakes in). 

In the last few years Fosun has bought several companies in ‘peripheral’ Europe.  This includes Folli Follie, the Athens-listed accessories designer and retailer, Club Med, the Paris-listed vacation and resort provider, and Raffaele Caruso, the Milan-listed men’s suit tailor.

Most recently it has been buying assets in Portugal, one of the worst hit countries since 2008’s financial crisis.  So far this year they’ve bought subsidiaries of state-owned insurance company Caixa Seguros E Saude and one of its largest health care providers, Espirito Santo Saude.  They are also reported to be looking at Novo Banco, which was formed from the remains of this year’s big corporate blow-up of Portugal’s than largest lender, Banco Espirito Santo. 

There are a lot of risks in Europe.  The Euro could continue to slide, the needed policy changes may never materialize, the Euro and European Union could break up.  These are much of the same fears that gripped financial markets some two years ago and sent equity markets there plunging.

And they could continue to plunge.  My base case for crisis investing is Indonesia which suffered the most during the Asian financial crisis.  Between 1998 and 2003 the Indonesian index rose and fell by over 30% no less than five times.  After an initial 108% rally from its March 1998 bottom, it fell 42% between July 1999 and March 2001.  If Europe is similar, the fall in equities prices may have further to go and Greece’s 30% dip over the last eight months could extend further despite its attractive valuations. 

However buying an asset at a low price tends to minimize risk of further downside. Prices are low now, but this does not mean they can’t get lower going forward.  But than prices could just as easily rise. Investors who missed 2012's low now have a second chance to get in at decent prices. 

Many, if not most or all, of the risk  are already reflected in the prices, and investors could do worse than taking advantage of the negative sentiment and news flow to pick up some quality assets at decent prices.  Longer term investors like Fosun are making significant investments and this may be a chance for the rest of us to get some others while they’re on sale.

1 comment:

  1. World Bank's Doing Business Report was published about the same time I wrote the above post. In it they noted the Southern European countries continue to reform their countries laws and regulations to make it easier for firms to operate. Here is a relevant passage "Southern European economies continue a steady pace of regulatory
    "Greece, Italy, Portugal and Spain—all among the economies most adversely
    affected by the global financial crisis—have maintained a steady pace of regulatory

    "As Doing Business 2013 reported, the pace picked up in the aftermath
    of the crisis, and this year’s report shows that the trend has continued. In
    2013/14 Greece reformed in 3 areas of business regulation measured by Doing
    Business, and Spain in 4.

    "Greece made starting a business easier by lowering the cost of registration. It
    made transferring property easier by reducing the property transfer tax and
    eliminating the requirement for a municipal tax clearance certificate. And it
    made enforcing contracts easier by introducing an electronic filing system for
    court users.

    "Italy and Spain also made starting a business easier. Italy reduced the minimum capital requirement, while Spain simplified business registration by introducing an electronic system that links several public agencies. Portugal lowered its corporate income tax rate and introduced a reduced corporate tax rate for a portion of the taxable profits of qualifying small and medium-size enterprises.

    "Spain reduced its statutory corporate income tax rate.
    Portugal made enforcing contracts easier by adopting a new code of civil procedure designed to reduce court backlog, streamline court procedures, enhance the role of judges and speed up the resolution of standard civil and commercial disputes. Spain made resolving insolvency easier by introducing new rules for out-of-court restructuring as well as provisions applicable to prepackaged reorganizations.

    "These economies, by actively reducing the complexity and cost of regulatory
    processes and strengthening legal institutions, are narrowing the gap with the
    regulatory frontier at a faster pace than the rest of the European Union."

    This is from page 42 of the World Bank's Doing Business 2015 Report. It is available at