Europe Paced Foreign Regions Amid Solid Earnings Increases
European funds took some of the spotlight this month after volatility in China drove some investors to look for other places to put their money.
World equity funds rose 3.81% in the month, maintaining their edge against U.S. diversified equity, which rose 3.47%. European funds returned 5.60%, lifting their year-to-date gain to 10.11%.
The last month was good to $1.6 billion AIM European Growth Fund.
The fund performed in the top 33% of its peers tracked by Morningstar in that span and has stayed in the top 10% for the past year.
Portfolio Manager Matt Dennis said a big plus was good earnings news. “We had an unusually solid reporting season,” he said.
Siemens’ Earnings
Siemens () made up 1.23% of the fund as of March 31. The company recorded a 39% increase in profit for the quarter. Siemens’ CEO resigned, yet the stock lost only 0.89% on the announcement.
Siemens is a restructuring story. “Siemens was the quintessential European conglomerate,” Dennis said. “Now they are emerging as a leaner and more focused business.”
The fund bought Siemens in late June, and the stock has moved from 92 to 123.
Swedish industrial equipment company Atlas Copco, which is 0.8% of the fund, reported its 20th consecutive quarter of profit growth.
“We got great numbers from our industrial, cyclical names,” Dennis said.
Dennis said many European companies are making a transition to more shareholder-friendly management strategies. Private equity is putting some pressure on them, as companies try to put the large amounts of cash they have on balance sheets to use. If this continues, he said, the outlook for European stocks is good.
European P-Es are also low, said Harold Sharon, manager of $1.3 billion Lord Abbett International Core Equity Fund. The fund has been in the top half of performers the last three years.
The average P-E is 13.5, or about where U.S. stocks were in 2003, just prior to a long market rally, Sharon said.
European financials, he said, are in a position to offer growth in new, underdeveloped markets.
Two bank stocks in the fund are National Bank of Greece and Kazkommertsbank of Kazakhstan. Both countries have almost nonexistent consumer financial service markets, Sharon said.
One big plus for banks in emerging markets is there are no unsecured loans. “If you don’t pay, they take the house,” he said.
National Bank of Greece expanded into Turkey last year, when the fund bought it. While the stock initially tumbled, it has since moved from 40 to 57. The company has posted 30% earnings growth and a 24% return on equity. It makes up 3% of the portfolio.
Kazkommertsbank is in a similar situation. Kazakhstan is an emerging market, but its economy is poised to grow, Sharon said. The country has a large natural resource base and a relatively stable government.
Though Europe was the big performer for the month, Asia is still a factor. Dennis said China’s growth helped drive Europe’s, despite the February hiccup, because the two are major trading partners.
Getting Wealthier
Richard Gao, manager of $1.1 billion Matthews China Fund, said the Chinese consumer is getting wealthier, with a lot of investment in infrastructure.
His fund is overweight in consumer goods, finance and industrial companies. Exports and earnings are still strong, he said.
The fund has been in the top 15% of its peers the last year, posting a trailing return of 42.48%.
Other areas Gao said will do well are hotels, supermarkets and apparel two of which are driven by local demand.
That demand will be a major factor in whether emerging markets perform, said Andrew Clark, head of research for the Americas at Lipper.
In many countries, growth is driven by foreign direct investment. China is one example.
Eastern Europe is similar. “Guess where the French and Germans are outsourcing?” he said. Answer: Eastern Europe.
Both areas need job growth to be driven internally.
Clark also noted that in Western Europe, economic growth has been slow. “Two percent is considered good these days,” he said.
As Eastern Europe looks to the West to supply goods, those countries have to ensure local people can buy them, Clark said.