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)
|
Portugal
|
-19.4
|
-23.8
|
Greece
|
-18.1
|
-20.5
|
Austria
|
-12.1
|
-18.2
|
Italy
|
-9.2
|
-2.2
|
Spain
|
-5.3
|
0.0
|
Hungary
|
-3.1
|
-7.6
|
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.
