Peter Moeschter, executive vice-president, Templeton Global Equity Group, at Franklin Templeton Investments, retains his enthusiasm for European stocks despite their strong performance over the past two years.
A traditional value manager, Moeschter notes that while valuations on these stocks are not as reasonable as they were during the height of the European and Eurozone financial crisis, they are not yet stretched. The stocks currently trade at a price-earnings multiple of around 15.5 times, "which is not cheap, but not expensive by historic standards."
Investor sentiment toward the European equity market has substantially improved. "The stocks have done well, enjoying a re-rating on the expectation of stronger earnings," he says. "When the companies deliver on this, there will be room for valuations to go higher."
Furthermore, he says, in the context of the global equity market, European stocks offer better relative value than their U.S. counterparts -- "although there are select opportunities in U.S. sectors, such as industrials and health care." Asia has offered up a few ideas, he says, "but stocks, on the whole, in the region are not that compelling from a valuation perspective."
The developed markets around the world have done well over the past two years or so, Moeschter says. In the 12 months to the end of January, the MSCI World Index, the benchmark for developed countries, produced a lofty total return in Canadian-dollar terms of 30.26%.
The MSCI All Country World Index, which includes both developed and emerging markets, had a somewhat lower total return of 26.45%. Emerging markets, says Moeschter, have dramatically underperformed in the 12 months to the end of January. "These stocks are coming off a period of strong performance and high valuations," he says. "It could still be a little early to become enthusiastic about these markets, though there are a few ideas."
At Templeton, Moeschter is responsible for both the global and EAFE (Europe, Australasia and Far East) portfolios for institutional and retail clients. The latter includes Templeton EAFE Developed Markets.
Through its extensive research network around the world, Templeton combs the global equity market for bargains. Its finely honed discipline is to build financial models of companies looking ahead five years. "In this way, we look beyond the current noise to future prospects," Moeschter says.
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| Peter Moeschter | |
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In keeping with the global team's assessment of value, Moeschter's global portfolio continues to be overweight in Europe at almost 50% of the portfolio versus its weighting in the MSCI World Index of some 28%. He is also substantially underweight in the United States at 35% versus its weighting in the benchmark of 55%. Asia at 15% is a slightly underweight position. "I am a little underweight Japan, which represents 9% of the benchmark." The portfolio has roughly 100 names.
When it comes to sectors, Moeschter has a slight overweight in financial services, which represent 21% of the MSCI World Index and is the biggest sector weight in the benchmark. "This exposure is a hold for me."
Moeschter reports that he has of late been adding to health-care stocks. They now represent some 18% of the fund versus the almost 12% weight in the benchmark." Other areas of emphasis include industrials at a market weight of some 11%. The portfolio has an underweight to the consumer-staples sector at around 5% versus its 10% weighting in the benchmark. "These more defensive stocks have slightly lagged the index, but they remain expensive."
A consumer-staple stock that does offer value, says Moeschter, is Japan's major beverage and soft-drinks company, Suntory Beverage & Food Ltd. This was spun out of the privately held parent Suntory Holdings Co. last July.
"Suntory Beverage & Food is the No. 2 company in its field in Japan and No. 4 in the world." The company is growing its presence in South-East Asia and Australia, using partnerships and joint ventures, Moeschter says. "As a separate listed company, Suntory Beverage can pursue its own growth strategy separate from that of its parent, which is well known for its whiskey and beer."
Moeschter's financial-services holdings continue to be focused on some major European financial institutions -- both insurers and banks. Most have operations both in Europe and around the world, he notes. "The stocks have rallied in the past two years from extreme lows, but they are still not expensive," he says. These financial institutions now have stronger balance sheets and "their operating earnings are starting to improve."
His financial services holdings include: AXA SA, a French insurer, Aviva PLC, a UK-based insurer, BNP Paribas S.A. based in France, ING Groep NV, a financial-services group based in the Netherlands, and UniCredit SpA, a bank and insurer based in Italy.
In health care, Moeschter's holdings are focused on high-profile global pharmaceuticals and leading medical-device companies. European names include Roche Holding AG of Switzerland and Bayer AG of Germany. U.S. names include Medtronic Inc. MDT, with a specialty in cardiovascular devices, and Amgen Inc. AMGN, a major U.S. biotechnology company.
| Amgen Inc. | Medtronic Inc. | ||
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| Feb 18 close | $123.84 | $56.88 | |
| 52-week high/low | $124.46-$82.92 | $60.93-$43.51 | |
| Market cap | $93.4 billion | $56.8 billion | |
| Total % return 1Y* | 48.6% | 22.9% | |
| Total % return 3Y* | 33.6% | 14.9% | |
| Total % return 5Y* | 17.3% | 13.4% | |
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| *As of Feb. 18, 2014 Note: All figures in U.S. dollars | |||
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Moeschter says that he bought into some of these names several years ago and has been finding new opportunities in this sector recently. "Our five-year financial model of the company's prospects allows us to assess the potential for development and commercialization before the drugs, devices or therapies become popular and proven."
Turning to industrials, Moeschter highlights two companies, which have "stumbled temporarily, yet the fundamentals are positive looking further out." They are: TNT Express NV of the Netherlands and U.S.-based Navistar International Corp. NAV.
TNT transports goods and documents by truck and air and is "one of the market leaders in this field in Europe." TNT's stock fell sharply after the European Commission blocked the acquisition bid by United Parcel Service, Inc. UPS in early 2013. "We built our position over the year," says Moeschter. "The company will benefit from the improvement in European manufacturing and enhanced consumer spending."
Navistar makes trucks, buses and diesel engines. "The company had problems with its new design for its engines and lost market share." It is addressing this challenge and should benefit from an improving economy and the replacement demand for its products, Moeschter says.
Moeschter has taken profits in and "significantly reduced his holding" in Adecco SA, a global personnel-placement company based in Switzerland. "The company suffered in the global economic downturn, but has recovered strongly and the stock has done well."
