The key to whether or not the European debt crisis spreads is confidence. The sight of politicians and bankers extolling faith in the solvency and liquidity of the banking systems and their governments’ debt positions achieves little. In Britain,for example, one Northern Rock depositor memorably said, “I only started to panic when the government said that there was nothing to be alarmed about.”
All it would take to spread panic is for one politician in any of the most troubled countries to point out that their nation is spending more on debt owed to foreigners, say, than on education (which is of course a valuable investment in the next generation). Ireland is already coming close to this; in 2007 the country paid 6.1% of its GDP on health and in 2012 the country will pay 5.7% of GDP on health. A populist movement as “austerity fatigue” sets in could lead to default and spread to other countries, leading to systemic default and another banking crisis. Yet while the outlook for the eurozone is worrying, Europe remains full of firms that operate globally, have strong balance sheets, and aren’t caught up in the inept failings of economically illiterate eurocrats. Here are just five examples of such companies.
Zodiac Aerospace (Paris: ZC) makes safety equipment for aircraft, but is also a world leader in the cabin interiors area. Airlines are always spending their cash flow on upgrading their all-important premium segment interiors (seats, in-flight entertainment systems, etc), so while airline stocks themselves are only for the brave, France-based Zodiac acts as a form of exchange-traded fund on airline investment spending (capital expenditure). The firm continues to buy rivals.
Europe’s rocky road out of crisis
The European Central Bank is raising rates just as its member countries go to the brink of bankruptcy. David Stevenson investigates whether it is doing the right thing.
Nestlé (Switzerland: NESN) is one of the world’s best-run firms. Investors forget that economies of scale mean that the economics of distribution are more important than those of production for global consumer staple firms. As Nestlé’s revenues in emerging markets grow, its margins in those markets have expanded as its market penetration increases. It now has a dividend yield of more than 4% and, following non-core disposals, a cash pile of over eight billion Swiss francs (about £5.5bn) to spend. Recent weakness caused by short-term panic about input prices gave a good chance to buy.
Anheuser-Busch Inbev (Belgium: ABI) is the world’s largest beer firm with an excellent track record of making value-adding acquisitions. In general, the track record of management is an area that we believe is not well-enough researched, especially for acquisitive companies. As the penetration of electricity increases in emerging economies (nobody likes warm beer!), then so too will the market for Inbev’s global stable of brands.
Piaggio (Milan: PIA), the owner of Vespa, is a classic example of a company that shows that you don’t have to be big to be global. The company recently opened its second factory in Hanoi, Vietnam, to keep up with booming demand, and has one quarter of its sales volumes in India.
Repsol (Spain: REP) is a firm we’ve owned for some time. Its share price has been hit because it is domiciled in Spain, but it operates globally. We believed there was significant shareholder value to be extracted from the company, and this has started, with the sale of 40% of its Brazilian assets to Sinopec in a new joint venture in which Repsol remains the majority owner. It now has sufficient cash to enact further capital expenditure.
• Julian Pendock is a founder and CIO of Senhouse Capital.
• This article was originally published in MoneyWeek magazine issue number 533 on 15 April 2011, and was available exclusively to magazine subscribers. To read all our subscriber-only articles right away, subscribe to MoneyWeek magazine.