Monday, May 14, 2012

Bargain Hunting In Europe

I wrote a piece last Friday noting the incredible values now to be found in the European stock markets.

Quoting global strategist Michael Hartnett of Merrill Lynch in a piece from last Friday:

European equities as cheap versus German bonds in almost 90 years. The spread between European equity dividend (4.29%) and German 10-year government bond yield (1.52%) was 277 basis points.  This yield spread has been surpassed only once (303 bps in Feb '09) since 1925.

This morning, with European markets once again in turmoil, 10 year German bunds now offer 1.45%, making the relative attraction of European equities even more startling.

Saturday's Financial Times had a long story about Carlos Slim, the Mexican multi-billionaire.

Mr. Slim has made most of his reported $69 billion net worth through investing in markets that others have fled, yet still offer compelling fundamental value.

In an article entitled "Mexico's meticulous mogul with an eye for a bargain", here's what Mr. Slim is up to these days (emphasis mine):

In 1982, as Mexico lurched towards a financial crisis so brutal it triggered the Latin American debt crisis, Mexican and international investors stampeded for the exit. Except for one:  Carlos Slim.

That was the year Mr. Slim, now the richest man in the world...set out on a shopping spree to Mexican companies at fire-sale prices across industries as diverse as aluminum, tobacco, insurance and rubber...

That {value-investing} approach drew him into the now-booming Brazilian telecoms market in 2002, when fears of a socialist government under then newly elected Luiz Inacio Lula da Silva were crushing prices.  It also led him into Argentina when it was still in disarray after financial collapse in 2001.  Now a similarly distressed situation has led him to the eurozone:  shares in KPN {a Dutch telecoms company}, which has operations in Germany, Belgium and Spain, had fallen 30 percent this year before Mr. Slim made his move.

Now, to be sure, the problems facing the euro zone are very real, and very serious.  Investing in Europe these days will require patience, and a recognition that while the eventual returns could be substantial the ride will be a bumpy one, to say the least.

However, it seems to me that if you are looking for markets that are trading on emotion rather than fundamentals, Europe is your first and only stop.