Europe remains the destination of choice for money managers seeking opportunities beyond U.S. borders.
Although Europe is often their first choice, international and global managers are searching - and finding - considerable investment opportunities in various world markets. Among their favorites: those in continental Europe, particularly Germany and France, Brazil, Australia and Hong Kong. Less popular markets include Japan and the smaller ones of Thailand and the Philippines.
Across the Atlantic
For the most part, international managers are bullish on the markets in continental Europe. While the strong economic growth of the United Kingdom leaves some cool toward that market, the upcoming arrival of the European Monetary Union is viewed favorably by many.
"We view the EMU as a very positive backdrop to the investment climate in Europe," said James Williams, chief global strategist with Baring Asset Management, Boston. "We see this as being more so in the equity side of things, as core European bonds have run their course. Two countries we like in Europe include Italy and Sweden. In Sweden, they have greatly improved their fiscal situation, while in Italy they've tended to lag behind in economic growth and we see some opportunity there." Baring manages approximately $24 billion in international equities.
At least one manager sees parallels between the United Kingdom and the United States. "No question that the U.K. is similar to the U.S. in that inflation and unemployment are low, and there have been strong economic recoveries in both countries," explained Bill Westhoff, senior vice-president of global investments for American Express Asset Management Group, Minneapolis. "However, in the core European markets, we've seen much slower growth as the various countries work toward meeting their EMU fiscal targets. That has left them without the ability to prime the pump, and only with lower currencies and interest rates as means of strengthening their economies." His firm manages approximately $20 billion in overseas assets.
Mr. Westhoff added that even in countries with weaker economies, such as Germany and France, there exist companies that are succeeding and "fully understand the need to restructure and compete in the global marketplace." In Germany, for example, he points to the automobile and machine industries as sectors that are succeeding despite a sluggish economy.
Mr. Westhoff cited Netherlands'-based Phillips N.V. as a prime example of the type of company succeeding in Europe. "It is going through a restructuring process and is certainly one of the better choices for us in Europe," he said. "In Japan, the weaker yen means better exports and the electronics sector is a good choice. In that sector, Sony Corporation is a company we like a great deal." He added that typically investors should expect about a 10% to 15% return on international investments over the course of several years.
Sharing enthusiasm for the European market is Janet Campagna, investment strategist with Barclays Global Investors, San Francisco. BGI manages about $43.2 billion in international and global strategies for U.S. clients.
See-saw on Germany
"There are a number of opportunities that we currently see in Europe," Ms. Campagna said. "While we are underweighted in both the U.S. and the U.K., we see some value emerging in places like Italy, Belgium and Ireland. We've been going back and forth on Germany and France, but the analysts' reviews of Belgium appear quite positive.
"Our style of implementation is very passive, but our indicators include historical ratios, the yield gap between stocks and bonds and the analysts' expectations."
Enthusiasm for Europe - including the United Kingdom - is also strong at Putnam Investments, Boston. "We see the United Kingdom as different from Europe, and recognize the divergence between the economic situation facing the rest of Europe and the U.K.," said Robert Swift, Putnam's chief investment officer for the growth group of international equities. Putnam manages $9.8 billion dollars in overseas equity for institutional investors.
"The Bank of England has had to raise interest rates to choke off inflation, and we see a parallel between the U.K. today and the U.S. in 1994," he said. "This is primarily being done to pre-empt problems and we see that as resulting, along with lower labor costs, in a stronger economy in the long run. We've been building up our U.K. positions, and in fact we are overweighted against the benchmark in the U.K."
With EMU on the horizon, Mr. Swift added, other areas of opportunity include "more marginal markets" such as Italy and Spain.
According to Mr. Swift, the rest of Europe has, for the most part, benefited from the drop in currencies by strengthening exports. "Germany in particular is geared toward exporting companies, but we still need to see concrete evidence there of restructuring, tax-cutting and other measures that will lead to sustained growth," he said.
The U.K. also is a favorite market for Delaware Investment Advisors, Philadelphia. "We have, for some time, liked the U.K. and believe it offers fundamentally good value relative to some other markets," said Tim Sanderson, Delaware's senior portfolio manager and director of research.
"Some money managers are concerned about the change in government from the Conservatives to the Labor Party. We believe that fiscal policy will remain constant and aren't worried about the change. In fact, we feel that with its strong fiscal policy the U.K. will continue to attract international investment."
Mr. Sanderson added his firm favors U.K. manufacturing companies, as they "tend to be global in nature."
"Large European companies such as British Petroleum Co. P.L.C. and Unilever P.L.C. are two firms we especially like," he said. "Although some managers are concerned about the strength of the pound, and that it will hurt exports, we feel that it will come back down and are confident in the future of the U.K. as an investment market."
Mr. Sanderson and Baring's Mr. Williams both like "the perceived boring markets" of Australia and New Zealand. Mr. Sanderson pointed to the willingness of both countries to move toward deregulation as a major reason for their attraction.
Putnam's Mr. Swift favors investment in Latin American markets such as Mexico, Argentina and Brazil. He cited low labor costs, good demographics and a strong connection to the U.S. economy as reasons for favoring Mexico.
The consensus among investment managers is that caution is required to find opportunities amid the economic chaos of Southeast Asia.
"I think Southeast Asia was the darling of investors for some time, but the weakness of the yen has hurt, while some economies have also been overheated," explained American Express' Mr. Westhoff. "It likely will take awhile for them to work out their problems, although there is still some value to be found there."
Putnam's Mr. Swift agreed, adding the currency strain in Asia is not surprising and is "a result of the currency link to the U.S. dollar. Given the last seven to nine years of inflation in the region, countries such as Thailand and the Philippines had to face a devaluation of currency."
However, Mr. Swift believes opportunities remain in the region, "especially in some companies whose share prices have done relatively well."
Praise for Hong Kong
Mr. Swift also had strong praise for the Hong Kong market, particularly given the recent "smooth transition" of power. "We are confident in the Hong Kong market, and we have recently put some investment into the property sector. Given the housing shortage there, we feel that's one sector that has great room for growth," he said.
Hong Kong also is alluring to other investment managers. "We are very much in favor of the Hong Kong market, and see great performance there," said Baring's Mr. Williams.
"As well, another Southeast Asian market we like is Singapore. It has underperformed the world markets and we believe it represents good value. In fact, in more than 20 years of investing I can't remember another time when we've seen Singapore at a discount."
Japan a 'real mess'
Mr. Williams has little praise for the opportunities in Japan.
"We continue to think that Japan has severe problems and are underweighted there," he said.
"We also still have concerns about the corporate earnings and over the level of interest rates in the country."
He said that as the investment opportunities have diminished in Japan - a market he characterized as a "real mess" - his firm has moved assets from Japan to the more hospitable European investment climate.
Mr. Swift shares Mr. Williams' concern over the investment climate in Japan. "I would not be surprised if the Japanese market was horrible by the year's end," he explained.
"They have a real problem with deregulation and many companies may soon find it hard to justify their existence. We are staying away from the banking and most of the retail sectors.
"Still, even in Japan today, there remain some opportunities, particularly in the technology sector."