EUROPE AND GLOBAL EQUITIES: BETTER THAN YOU THINK
We thought it might be useful to provide a quick recap of commentary from a well respected money manager who works extensively in equities – both foreign and domestic. Following are some thought and observations from David Herro, Co-manager of Oakmark International, and Chief Investment Officer for International Equity at Harris Associates.
Yet again, global equity markets are churning over worries about the euro’s future. Will Greece stay in the eurozone or be forced out? If there is a “Grexit,” how will it be carried out and what will it mean for the rest of the eurozone? And could others be leaving as well?
As we all watch the macro playing out in Europe and elsewhere around the world, we’re thinking that this is a great time to be a bottom-up international investor. Panicky short-term sellers are driving down share prices, and those of us focused on the long term are benefiting from the bargains.
The situation in Greece has focused Europe on whether fiscal stimulation or debt reduction is the correct economic policy fix. I think this portrayal is a false either-or choice.
Undoubtedly, given high existing debt levels, governments have to stop spending more than they collect in revenues, especially in periods of economic growth. And, given that the multiplier on government spending is significantly lower than that of private-sector spending, one can make the case that sustainable growth cannot come from increases in government spending. Governments can better stimulate growth by simplifying regulation, freeing up labor markets, and removing policies that hamper innovation and risk-taking. And the beauty of these types of structural reforms is that they need not require a large, upfront expenditure and their impacts are long-lasting.
There is much at stake, and the direction Europe takes will be felt in the U.S. and around the world, but not nearly as significantly as the headlines suggest. A workable solution can be found – even Germany, which has toed the hardest line on austerity, said over the weekend that it is open to a range of growth-oriented ideas. But whatever the solution turns out to be, it should be clear that it would be wrong to revert to the shortsighted, free-spending ways that contributed so much to the current problems.
The picture is brighter elsewhere in the world, where European exporters and financial companies do much of their business.
The IMF has recently upgraded its estimate of 2012 global economic growth to 3.5%, increasing to 4% in 2013. Japan, the world’s third-largest economy, posted a 4.1% annualized growth rate in the first quarter. China, the world’s second-largest economy, is growing at 8% and the U.S., the world’s largest economy, is projected to grow faster than 2%.
And, despite all the negative headlines, Europe on the whole managed to stay out of recession during the first quarter. Germany, its largest economy, is benefiting not only from a weaker euro but also labor-market reforms passed years ago that has helped drive down unemployment to some of the lowest levels seen in more than a decade.
I mention all of this because, despite the macroeconomic uncertainty in southern Europe, the world economy is doing OK. And in this environment, companies are able to make decent profits.
Over the past six months, members of our research team have met with companies from Europe, Japan, Australia, Hong Kong and China. The good news is that most companies are coming in with results that have met or exceeded our estimates and they have not witnessed any major deterioration in their operating conditions. They may be cautious, but they have not been cutting people, inventory or investment plans. Based on what we are seeing and hearing, the aggressive fall in share prices, especially in Europe, seems more than a bit overdone.
We don’t know whether Greece stays or leaves the euro, and we don’t know when the current European crisis will finally be behind us. What we do know is that, despite nearly a year of nasty headlines and volatile markets, the global economy remains resilient and corporate performance is robust. Combine these two factors with weak share prices, and it’s easy to see why we are enthusiastic about current investment opportunities.
We are value investors with a long time horizon, and in our view this is the type of environment where we can most successfully implement our investment style. Sure, the headlines can be scary, but we believe this is a great time to invest in quality global companies selling at distressed prices.