Cover Story: Where To Invest '96: Strategies For Stocks: Europe
IT LOOKS LIKE THE YEAR OF THE EUROBULL
Money managers across Europe weren't sad to see 1995 end. It's not just that many of them become red-faced trying to explain how they missed the rally in U.S. stocks by betting on a correction some 1,200 points ago in the Dow Jones industrial average. They also bet heavily that the Continent would witness strong economic growth, rising earnings, and stronger bourses this year--only to see their hopes dashed. Although markets in the Netherlands and Switzerland chalked up solid gains amid a flight to quality, those in Italy and France declined, and Germany gained a mere 6%.
But to a growing number of pros on both sides of the Atlantic, 1996 looks to be the year Europe will finally deliver. The Continent's high interest rates are poised to come down--perhaps dramatically--as inflation remains tame and weakening growth forces the German Bundesbank to admit that its monetary policy has remained too tight for too long. Throw in a stronger dollar, expected tax cuts in Germany and Britain, and no tax increase in Spain, and all the ingredients for a bull market may be almost in place. Then, if France's government wins its gamble to defeat strikers nationwide and curb its welfare-state excesses, "we might have just that something that seems to be lacking to spark a sustained rally," says Christopher Kwiecinski, who is chief investment officer at Banque Indosuez.
Kwiecinski has plenty of company. Richard Davidson, a London-based strategist at Morgan Stanley & Co., thinks that European stock markets will see "their best year since 1993," with average total returns "in the region of 20%" as interest rates fall. How far will they go? Talal Shakerchi, manager of the European portfolio at Britain's Old Mutual Portfolio Managers Ltd., sees short-term rates around Europe falling 2 to 3 percentage points by mid-1997.
TEMPTING PROSPECTS. What's more, Shakerchi figures European companies "are just starting to see the benefits of downsizing and technological innovation" that fueled striking U.S. productivity gains--and the bull market--in '95. That makes small Continental companies, which have underperformed the broader market by as much as 40% over the past three years, particularly tempting. His favorites include Scandinavian lenders, particularly Norway's Fokus Bank, a possible takeover with a price-earnings ratio of only 4. He is also buying Germany's Adidas, whose p-e of 10 is a bargain. He likes cyclicals, too, including cash-rich Swedish steelmaker SSAB, another tempting takeover candidate. And why not? Compared with growth stocks, says Lehman Brothers Inc. European strategist Joe Rooney, Continental cyclicals are now selling "at levels not seen since the invasion of Kuwait."
Indeed, a clutch of Eurocyclicals are inviting notice now. Rooney favors the French auto manufacturer Peugeot and parts maker Valeo, which will benefit if an end to France's social turmoil restores consumer confidence. But Morgan Stanley's Davidson prefers other blue chips, among them French telecom giant Alcatel, Holland's Philips, and Mannesmann, the German engineering group.
Restructuring, technology, and lower rates bode well even for Europe's higher fliers. Switzerland's equity market has been buoyed by an immense inflow of capital from German and other investors seeking a safe haven during the European Union's long-running currency turmoil. But Hans Rudolf Muller, a senior asset manager at Credit Suisse in Zurich, says the fun "may not be over yet." He likes pharmaceutical makers Roche Holding and Sandoz, as well as foodmaker Nestle and insurer Swiss Reinsurance Co.
"TIP OF THE ICEBERG." Europe's potential hasn't made total bulls of all stock pros. With the Continental economy slowing, Michael Woodward, investment director for Europe at Edinburgh's Ivory & Sime, figures that "we've only seen the tip of the iceberg in revising downward" earnings forecasts for 1996. "That means markets certainly won't look cheap." Yet Woodward has no intention of backing out of his biggest position on the Continent: French stationery and office-supply wholesaler Guilbert, which has used its market-leader position to wring 15% growth out of a languishing economy.
Indeed, Europe's investment pros are hardly running for cover. Just give them cheaper money, more corporate restructuring, and some good news on the political front. These three wishes may have been unrealistic a year ago. Now, it looks as if they just might come true.By Bill Javetski in Paris