As the European debt crisis rages on, people in the eurozone are voicing their opinions about austerity measures, bailouts and such, not just on the streets, but also at the polls. As the winds of political change swirl, the future of the eurozone seems to hang in the balance. Investors vote with their dollars, and many see the pool of possible investment candidates in the region narrowing amid the uncertainty. Tucker Scott, portfolio manager of Templeton Foreign Fund, and a vocal fan of a thorough vetting process, says he’s focusing on long-term outlooks, not just today’s headlines. And, he’s finding select European stocks with dividend-growth potential—in some cases even better opportunities than in the U.S.
His thoughts in brief:
- Scott believes the “political will is there” for the eurozone to pull through its crisis, but Greece could be a sacrifice.
- In Scott’s view, once credible, enforceable fiscal restraint is in place in the eurozone on a national level, there should be less worry about sovereign creditworthiness.
- In general, he believes the dividend yield in certain mainland European stocks looks favorable right now compared with certain U.S. stock dividend yields and government bond yields.
With a wide investment universe to roam, Scott and his team have the latitude to uncover undervalued stocks across the globe. They’re able to narrow the field by taking a diversified, bottom-up approach that focuses on countries, sectors, and companies outside the U.S. where they see solid long-term fundamentals. Given the headlines of late it’s surprising to hear, but Scott says this includes Europe, despite eurozone uncertainty.
We are fully conscious of the difficulties facing Greece, Portugal and, to a lesser degree, Ireland, but it’s really important to keep things in perspective. Those three countries represent only about 5% of eurozone GDP 1, so while not completely irrelevant, they are relatively small in the grand scheme of things.
When we focus on core Europe, we are actually seeing some good news, especially coming out of Germany and the northern countries where we see a solid foundation for growth. We are of the opinion that Italy and Spain will probably have to agree to some real reforms, but in return we think that the other eurozone countries will pull together and pull through. We believe the political will is there, although it’s possible there may be a sacrifice of Greece or another country.
We think in the long run, that (sacrifice) could be a good thing – to make it known there could be a downside to not playing ball with the other countries and the importance of having fiscal spending restraint at the national level that is credible and enforceable. Once that’s in place, then I think there will be a lot less worry about sovereign creditworthiness and I think things should calm down quite a bit.
While Europe’s macroeconomic backdrop may look a little unsettled right now, Scott has found some compelling opportunities in dividend-paying stocks, which he believes compare favorably to dividend yields in the U.S.
The average dividend yield available today of mainland European stocks is about 5.5% (not including the UK).2 That’s an attractive dividend yield in today’s environment when you compare it with the S&P 500 Index average dividend yield of about 2% and government bond yields in the United States or in Europe. The German 10-year bund is around 1.5% and the U.S. Treasury 10-year note is about 1.7%2 I think this is indicative of how fearful people are today of equities in general and how they have really been bidding up the price of perceived “risk-free” assets such as U.S. Treasuries or German bonds.
Dividends can grow over time and actually can grow with inflation, unlike a bond where you can get a meaningful hit to the underlying value of the principal. I think dividend yields compare favorably with interest rates, and in my view, it doesn’t make much sense for most long-term investors to be ignoring equities with those kinds of yields.
So, what kinds of companies is Scott looking at in Europe? Most consumers (at least in the U.S.) are familiar with U.S.-based retailing giant Wal-Mart, but might not be familiar with French-listed Carrefour3, the world’s second-largest retailer which has an emerging market presence. Scott says Carrefour is an example of a key player in the space that he believes the market has undervalued, with sales not that far behind Wal-Mart and with attractive long-term growth prospects.
It’s been trading at about 9-10 times earnings versus Wal-Mart, at about 12-13 times earnings. That’s an example of the kind of opportunities we see in Europe today.4
As Sir John Templeton said: “Search for bargains. You should try to buy that particular investment whose market price is lowest in relation to your estimate of its true value.”
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Read more about our global investment perspective in “Global – The New Core.”
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What are the Risks?
All investments involve risks, including the possible loss of principal. Special risks are associated with foreign investing, including currency fluctuations, economic instability and political developments. Investments in emerging markets involve heightened risks related to the same factors, in addition to those associated with these markets’ smaller size and lesser liquidity.
Investing in dividend paying stocks involve risks. Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors, or general market conditions. Companies cannot assure or guarantee a certain rate of return or dividend yield; they can increase, decrease or totally eliminate their dividends without notice. A fund’s investment return and principal value will fluctuate with market conditions, and it is possible to lose money.
These and other risk considerations are discussed in the Templeton Foreign Fund’s prospectus.
1. Source: IMF World Economic Factbook, April 2012
2. Source: Bloomberg. As of 5/22/12: Dividend yields in Europe were 5.5% per the EURO STOXX 50 Index. The dividend yield of the S&P 500 Index was 2.3%. The U.S. 10-year Treasury note yield was 1.8% and the 10-Year German government bond yield was 1.5%. S&P 500 Index: STANDARD & POOR’S®, S&P® and S&P 500® are registered trademarks of Standard & Poor’s Financial Services LLC. Standard & Poor’s does not sponsor, endorse, sell or promote any S&P index-based product. Indexes are unmanaged, and one cannot invest directly in an index. Indexes are unmanaged and one cannot invest directly in an index.
3. As of 3/31/12, Carrefour SA represented 0.50% of Templeton Foreign Fund total net assets. As of 3/31/12 Templeton Foreign Fund held no Wal-Mart common stock. Holdings subject to change.
4. Source: Bloomberg, 5/22/12.