Each week, a professional investor tells MoneyWeek where he'd put his money now.This week: Mark Page, fund manager, Artemis European Opportunities
What a difference three years can make. When we launched the Artemis European Opportunities Fund in late 2011, European equities were seen as toxic. Today, they are in fashion. Significant amounts of money have been flowing into the market for the first time in a decade and share prices are up by 20% since the New Year. Is this enthusiasm rational? In absolute terms, European equities don't look cheap. The trailing price-to-earnings (p/e) ratio of the median average stock is quite high, at 21. However, this is because earnings are currently 20% below their long-term trend, due to the weak economy. The lower euro, cheap oil and the European Central Bank's quantitative-easing programme mean growth is now accelerating. If this pushes earnings back towards the long-term mean, the p/e would be more like 15.
And value, of course, is relative. European equities may be the best house in a lousy neighbourhood. Just look at the alternatives. Cash? It yields nothing. Bonds? The ten-year UK gilt yields just 1.5%, while in the US, ten-year Treasuries yield less than 2%. So the 3% average dividend yield paid by European stocks looks attractive. As for other global equity markets, US companies are expensive. They have benefited from stronger growth at home, so their profits are significantly above trend. If we look at earnings on a cyclically adjusted basis, US equities trade on a p/e of 25, compared to just 15.6 in Europe. Meanwhile, China is slowing, and many other emerging markets are vulnerable as speculative inflows of foreign capital are withdrawn.
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There is still long-term growth potential in emerging markets, however. One way to tap into this is via DKSH (Zurich: DKSH). Based in Zurich, it helps other companies to grow and become more efficient in regions where they have no presence or insufficient scale. It's dominant in Asia and its sales have grown by 8% a year for a decade. That should continue as the Asian middle class grows and companies outsource non-core activities, such as distribution and logistics. DKSH is financed conservatively. Pre-tax, it generates a 15% return on invested capital. In comparing stocks, I see price-to-cash-flow (p/cf) as a more useful measure than p/e. (Earnings can be manipulated in a way that cash flows cannot.) DKSH trades on a p/cf multiple of 20. But because its earnings per share should grow by 10% a year, that valuation is more than justified.
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Another company with strong growth potential is Germany's Brenntag (Xetra: BNR), which distributes chemicals. Chemical producers struggle to serve smaller customers cost-efficiently. Those customers often need "just-in-time" delivery of small quantities of chemicals, or special mixtures and compounds. This explains why third-party distribution has outgrown the wider chemical industry by 2.5% a year. Brenntag is the global market leader in this sector. It has been earning a return on equity above 15% and has grown its earnings by 9% a year, justifying a p/cf multiple of 17.
Spanish discount supermarket Dia (Madrid: DIA) has an 8% share of its domestic market, where it is the most profitable retailer, thanks to economies of scale and its strong own-brand sales. It has grown by buying less profitable competitors. It is also expanding rapidly in Latin America it's already Brazil's fifth-largest retailer. It trades on a p/cf of below ten. Like many of Dia's products, this could be a bargain.
