Europe is once again one of the world’s least-favourite investment destinations. As ever, positioning oneself away from the herd rather than chasing after it presents opportunities for patient investors.
There are reasons to be very wary about Europe if one is simply buying the market in its entirety. Europe is made up of more than Greece. Therein lies the irony. If Europe was fiscally homogenous, Greece would not be in trouble. The fact that Greece finds herself a fiscal pariah means that markets are in fact discriminating between solvent and insolvent countries. But in many cases equity prices have been marked down indiscriminately.
There are risks for the eurozone. These lie chiefly in the banking system. Northern Europe’s banks have large and well-documented exposure to southern Europe, and hence investing in the banks remains a brave proposition for the moment. While the Greek situation is unresolved, and the risk of contagion to select other countries remains, prudent investors would also be wise to steer clear of firms domiciled in the affected countries where the main profit driver is domestic. These two factors effectively rule out buying ‘the market’ or a closet tracking fund.
However, there remain some very interesting opportunities. Europe is home to firms that are world leaders in their sector, have global franchises, and trade at substantial discounts to their US and emerging-market peers. A weaker euro also benefits the firms. In short, Europe offers stock-pickers the chance to buy global growth at a European discount.
• Where to place your bets in Europe’s no-go zone
• Where to place your bets in Europe’s no-go zone
Moreover, with investors growing wary of government debt for well-documented reasons, investors should remember that most of the total returns from equities are derived from compounding dividends, rather than the greater fool theory of ever higher share prices (and price multiples).
Here are four firms that fit these themes of global exposure and decent yield. First, there’s Tognum AG (GER: TGM). This German company has a market capitalisation of just €2bn, but is a prime example of the investment gems to be found in Europe. Tognum is 20% owned by Daimler. It’s a world leader in advanced diesel engines and propulsion systems. Tognum supplies marine diesels for navy applications, as well as the high-end marine leisure sector, to firms such as Sunseeker, Ferretti and Princess Yachts. Tognum also supplies the superyacht market (including, it is believed, Roman Abramovich’s latest and largest vessel). It also supplies locomotive engines for Siemens, Bombardier and Vossloh.
Lastly, Tognum provides power generation units. It was involved in powering the Bird’s Nest Stadium in the 2008 Beijing Olympics, and is winning contracts to supply the emergency back-up power systems for Chinese nuclear power stations. Tognum trades on a prospective p/e of 16, compared with Caterpillar on 25, and a dividend yield of 2.8%, versus Caterpillar on 2.5%. Tognum has a global customer base, high-end technology, and a proven track record. Lastly, the company is registering an increasing share of recurring income from the maintenance, repair and overhaul of the installed units.
Another good bet is Nestlé (Zurich: NESN). The group has consistently shown organic revenue growth significantly above global GDP growth. It may look dull, but it’s a steady performer, a ‘marriage stock’– to have and to hold. The company garners most of its income growth from emerging markets and shows the valuation discrepancies between emerging market companies and the developed world. For example, Nestlé trades on a prospective p/e of 17 with a dividend yield of 3.0%. Yet Nestlé India yields just 1.5% and trades on a forward p/e of 32.
I also like Piaggio (Milan: PIA). The company owns the Vespa brand, amongst others. It’s retaining market share in Europe and managed to grow operating income in 2009, despite registering an overall drop in revenues. It achieved this through sensible and prudent management of its cost base. Some 20% of Piaggio’s volumes are in India, and the company also opened a factory in Hanoi in 2009. Management isn’t rushing headlong into emerging markets, but is executing a sensible business plan efficiently. Piaggio is a good example of a firm that captures global shifts in consumption patterns; frugality in the West, and upgrading in emerging markets. As credit becomes available, people replace their bicycles with motor scooters. Piaggio yields 3% as well as offering decent growth.
Finally, there’s TPSA (Warsaw: TPS), which is Poland’s incumbent telco and is controlled by France Telecom. A deal with the Polish regulator means TPSA can maintain market share in exchange for investment in its network. It carries very little debt and offers a dividend yield of 9%. It’s also exposed to any Polish equity rally. Compounding an annual dividend of 9% should yield handsome returns, with a higher yield and arguably far less risk than southern European government bonds.
• This article was written by Julian Pendock, CIO at Senhouse Capital .