'EUROPEAN COMPANIES ARE IN AN EXTRAORDINARY POSITION'
Jeffrey M. Weingarten, managing director of Goldman Sachs International in London, is no fan of Asia these days--despite bargain-basement valuations. He's putting his bets on Europe. Here are his views on world markets:
ON WHY A BULL MARKET IS SUSTAINABLE
"Low interest rates and deflationary pressure from the Asian crisis have driven down the cost of capital. Now, the spread between the cost of capital and the return on capital is higher than ever. So companies are earning better returns on their investments. Also, 10 years ago, stock indices used to be dominated by big cyclicals such as General Motors, Siemens, and Mitusbishi. Now major global indices have twice as many high-growth companies, such as Coca-Cola, SAP, and Sony. The return on capital will be higher in a market dominated by fast-growing, less cyclical companies."
ON THE U.S.
"U.S. companies will continue to earn high returns relative to the cost of capital. But for the most part, this is already reflected in share prices."
ON JAPAN
"If Japanese companies focus on restructuring, and if the government takes decisive fiscal action, such as implementing permanent tax cuts, Japan could turn out to be the biggest investment opportunity. But right now, there's no sign of that happening. Still, the risk of being underweight in the Japanese market is higher than in the past because the value of the Nikkei has dropped by one-half in the last few years."
ON ASIA
"Economic worries haven't disappeared, and the recovery will be fairly protracted. Think defensively, and focus on blue-chip stocks such as Hutchinson Wampoa, one of Hong Kong's largest conglomerates, trading at half its pre-crisis level. CITIC Pacific [another Hong Kong conglomerate] also is trading at a 50% discount."
ON EUROPE
"European companies are in an extraordinary position. Interest rates are expected to remain low. Company returns will remain high, as part of a trend toward greater efficiency. There has also been an enormous shift in the way companies view shareholders. At the same time, the cost of capital has declined dramatically. Most of Europe's strong performance is the result of higher earnings growth, whereas in the U.S., it's driven by high price-earnings ratios."
HIS STOCK PICKS
"We like European financial companies, such as Zurich Insurance Co., which has made lots of diversified acquisitions within the financial services industry.
"ING Barings is another favorite. They have substantially improved returns and are now moving into the very lucrative area of asset management."
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