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European Stocks Find Fans at U.S. Funds

Posted by: Ben Steverman on June 24, 2010

Despite a fiscal crisis in Europe that is dragging stocks lower day after day, European stocks are finding enthusiastic buyers among an unlikely group: American fund managers.

That’s the clear impression from the Morningstar Investment Conference, an annual gathering in Chicago of 1,350 financial advisors, fund managers and other investing pros.

On June 24, the second day of the three-day conference, the Dax Index, a measure of the German stock market, fell 1.4%, and the Euro Stoxx 50 index, covering 50 stocks from across Europe, dropped 2.2%, bringing its year-to-date losses to a negative 10.8%.

But also on June 24, managers of global stock funds were extolling the virtues of European equities in panel discussions.

The common theme for these investors: The problems in Europe are serious, but the stock market has overreacted and many European stocks are selling at terrific discounts.

“What’s happening in Europe is of great concern,” said Franklin Mutual Series portfolio manager Philippe Brugere-Trelat, “and that’s the main reason stock markets in Europe are so cheap.”

But, he said at a panel discussion on “stock picking across the globe”: Many companies headquartered in Europe are “not European at all” in the sense that a large portion of their sales and earnings come from outside the continent.

Furthermore, the weaker euro gives a big advantage to European companies selling outside Europe. “The euro at $1.20 is a very big cherry on the cake in terms of earnings and sales,” Brugere-Trelat said. The euro on June 24 was trading at $1.23, down 13.9% from the beginning of 2010.

At a different panel discussion, Artisan Partners portfolio manager Mark Yockey admitted he has a relatively high exposure to European stocks — especially to financial issues that could be most vulnerable to debt problems.

However, he said, many European banks are like his holding, ING, which is one of three main banks in the Netherlands. An oligopoly like that gives ING and other similarly situated banks extra strength and staying power. “We think once things settle down they’re going to grow their earnings,” he said.

Another speaker and manager of foreign stocks on the same panel, Janus Capital Management portfolio manager Brent Lynn, said he has a relatively lower exposure to Europe but that he’s ready to start buying.

“We have more compelling valuations in Europe than I’ve seen in a number of years,” he said. The sovereign debt problems make him “worried … but intrigued by the prospect of buying high quality companies” at cheap prices.

The deals are so good that Lynn said he was considering buying domestically oriented banks in Italy and Spain, two of the most indebted European nations. His targets are “franchises that we think will be survivors.”

If investors are convinced the Europe stock slide has gone too far, this could be a great time to buy. Extending that logic, the market’s continued slide means that European stocks could be an even better deal in the future.

Referring to this, Yockey won a laugh from his audience when he said: “The opportunities are getting better and better every day.”

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Bloomberg Businessweek’s Ben Steverman focuses on the latest moves in financial markets and emerging trends in stocks, bonds, and funds, always with an eye toward giving readers a better understanding of the sometimes confusing and often chaotic world of money. Standard & Poor’s senior index analyst Howard Silverblatt will also provide his take on companies’ finances and the markets. Voted one of the “Top 100 Finance Blogs” in 2007.

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