Debt Contagion? A falling euro? Causeway Capital's Sarah Ketterer refuses to waste a crisis
Investors worry that problems in Greece will spread. In reality, only governments face a debt crisis. The balance sheets of most private companies are in fine shape. Even if European economies remain sluggish, many top companies should thrive. Since dividend yields rise as stock prices fall, many European stocks now yield more than government bonds—a solid indicator that shares are cheap.
One of my favorites is Sanofi-Aventis (SNY), a French drugmaker that yields 5 percent. Based on this year's [earnings] estimates, the price-earnings ratio is 7. In the past, the p-e multiple was often in the mid-teens. Major drug stocks have languished in recent years because of concerns about patent expirations and the uncertainties surrounding U.S. health-care legislation. Sanofi-Aventis suffers from the additional problem of being based in Europe, but it has a fortress balance sheet and a promising pipeline of drugs. U.S. legislation should not prevent the drugmaker from reporting growing sales and earnings.
A lot of investors are also concerned that the 14 percent drop in the euro against the dollar this year is a sign the European economy is weakening. In fact, the decline of the euro is a big plus for many companies. The gradual depreciation is making exports less expensive, and many top European companies get most of their sales abroad. The decline in the euro will hurt the value of European stocks for U.S. investors, but increased export sales should help to boost sales and compensate for currency translation losses. A strong exporter is EADS, owner of Airbus. Sales will be strong in emerging markets. Wealthy Middle Eastern countries are buying new planes at a time when U.S. airlines are flying aging fleets. [On June 8, Emirates Airline announced an order of 32 A380s.]
Some European stocks are particularly undervalued because the market has failed to recognize that unwieldy conglomerates have disposed of weak units and begun to focus on their strongest products. We have bought AkzoNobel, a big Dutch maker of paints and specialty chemicals. The company sold a weak health business a few years ago, Organon Biosciences, and began focusing on industrial businesses.
In the past, we've underweighted Japan. Lately we've been increasing exposure because many stocks are depressed. Investors worry Japan has high debt levels and weak growth prospects. Because the population is aging rapidly, demand could remain subdued for many products, but some companies seem poised to thrive. My fund owns insurer Sony Financial (SNYFY). It has a strong lineup of products aimed at aging consumers who must save more to cover long retirements.
Many Japanese manufacturers are also cheap because investors view them as unexciting cyclical businesses. Some companies have enjoyed booming sales to China, though. I like Fanuc, a maker of robotics and factory automation equipment. With vehicle sales climbing in China, Fanuc is reporting a spurt of orders.
The Stats: Sarah Ketterer is chief executive officer of Causeway Capital Management, which oversees $10.3 billion in assets. She is also portfolio manager of the $1.8 billion Causeway International Value Fund (CIVVX). The fund ranks in the top quintile of peers for the year ended June 7 and in the top third for three years, according to Morningstar.