International equities markets have been struggling with Europe’s attempts to quell the fiscal fires in Greece, as well as concerns of a slowdown in China. In response, some international equity fund managers are seizing opportunities in beleaguered Europe, while others are favouring the high-growth dynamics of China and its Asian neighbours.

One of those in the latter camp is Chuk Wong, vice president of Toronto-based Goodman & Co. Investment Counsel Ltd. and manager of Dynamic EAFE Value Class Fund.

“There have been a number of macro headwinds in the past few months,” says Wong. “There is the European sovereign debt crisis, inflation in emerging economies — particularly China, and the earthquake in Japan; not to mention, the political tensions in the Middle East. These macro issues are worthy of attention. However, these are not new news. They’ve been in the market for some time.”

Wong argues that we have seen the worst — at least, in the medium term. “When it comes to the Greek bailout, we are just entering Phase 2,” says Wong, adding that Europe needs to restructure and make itself more competitive in the longer term.

“But I am cautiously optimistic that Europe will come out with a solution to help Greece meet its financial requirements,” Wong adds. “At the end of the day, European policy-makers are aware of the potential contagion of a major default by Greece. They will come up with a solution to avoid a Lehman Brothers-like collapse.”

Wong says the situation could occupy policy-makers for another 12 to 18 months. In the meantime, he notes, excessive pessimism has resulted in dirt-cheap European equities valuations. The continent’s stocks are trading at 10 times 2011 earnings vs 11 times for the MSCI emerging markets index and 14 times for the S&P 500 composite index.

“The European story is definitely a contrarian story — and a stock-picker’s paradise,” says Wong. “If you’re willing to dig under the surface, you will find a lot of well-managed companies. This is part of my strategy: focusing more on the small- and mid-caps rather than large-caps.”

A value investor, Wong has an overweighted 50% of the Dynamic fund’s assets under management in Asian companies (vs 27% in the MSCI EAFE index), 42% in Europe (65%), 7% in cash and 1% in gold.

Running a 60-name fund, Wong likes Bank Negara, Indonesia’s fourth-largest commercial bank. The state-owned institution was poorly managed until several years ago, when the government brought in new management and changed the corporate culture.

“According to the World Bank, Indonesia is the country that has deleveraged the most,” says Wong, adding that Bank Negara is also benefiting from an economy that’s growing at around 5% annually.

Acquired about two years ago, Bank Negara stock is trading at about 3,875 rupiah ($0.45) a share. Wong has no stated target price.

Within Europe, Wong likes mid-cap Germany-based companies such as Duerr AG. “It’s a global leader in designing and building paint-finishing systems for the auto industry. It has half of the market,” says Wong. “A lot of capacity has been built in emerging markets, by foreign and domestic players. There is a strong demand for these kinds of high-end systems.”

Wong acknowledges that the auto industry in developed markets — such North America and Europe — went into a downturn two years ago. “But things have been recovering,” he says. “The demand from the West is for replacement. [The auto industry is] now running at normal capacity, and will need to replace their existing components. This should drive demand for Duerr’s products.”



Although Markets Are focused on the grim macro picture in Europe, there still exist many opportunities, says David Ragan, director at Calgary-based Mawer Investment Management Ltd. and manager of Mawer World Investment Fund.

“If you had nothing to worry about,” says Ragan, “you should worry — because stocks are too expensive.”

At the same time, he notes, investors have to dig deeper to find better opportunities even when optimism is running high: “Everyone knows that China is growing very fast — there’s no value there. But knowing that one particular company will grow faster than expectations — that’s where an investor can add value.”

The economic situation in Greece is not of great consequence, in Ragan’s view, as Greece is a small, peripheral economy that can be dealt with.

“We had [Europeans] doing short-sighted, unhealthy things financially,” says Ragan. “They needed to make changes. Politicians needed to run on election platforms that were prudent and make their countries sustainable from a fiscal perspective. Politicians are now winning on these kinds of platforms. This is a huge, paradigm change, which is positive for the long term, although it’s definitely bumpy right now.”

A bottom-up investor, Ragan argues that macroeconomic forecasts add little value, and sometimes work against investors: “The economic worries that are in the air are actually great, because they drive money to do inefficient things. That’s why we’re excited about EAFE markets. Money is focused on Asia and away from Europe because of the problems that we all know about. [Europe is] where we’ve been finding a lot of opportunities.”

Reflecting Ragan’s contrarian view, the Mawer fund has about 70% of its AUM in Europe, about 13% in Asia, 5% in Australia, 5% in Brazil and smaller weightings in various parts of Africa.@page_break@One top pick in the 58-name Mawer fund is Fuchs Petrolub AG, a Germany-based mid-cap producer of industrial and automotive lubricants and hydraulic oils, which it markets around the world.

“[Fuchs] makes lubricants for absolutely everything, including edible lubricants used in food production,” says Ragan. “The common factor is that these lubricants are specialized, and microscopic in cost relative to the process. The [firm’s] managers make great returns on capital.”

Bought in April 2007, Fuchs stock is trading at about 36.1 euros ($50.50) a share. Ragan has no stated target price.

Another favourite is Anta Sportswear Products Ltd. A Hong Kong-listed China-based firm, Anta is a leading maker of sports footwear with a market cap of around US$4.5 billion. “It’s a very well-managed, mass-market sportswear firm. It’s not like a Nike; it’s what everyone [in China] can afford to buy,” says Ragan, adding that the company has the rights to use the Fila brand in China. “It’s growing earnings at a double-digit rate.”

Acquired last March, Anta stock is trading at about HK$14.30 ($1.75) a share.



Although EAFA markets are down, Don Reed, presi-dent and CEO of Toronto-based Franklin Templeton Investments Corp. and manager of Templeton International Stock Fund, argues that the potential upside is greater than in Canada or the U.S.

“The Canadian market has three sectors — energy, materials and financials — that comprise 78% of the market,” says Reed. “We saw what happened when the crude oil price dropped this summer — so did the Canadian market.”

More important, he adds, valuations are better in Europe and Asia: “They are lot more compelling for an investor outside of Canada than inside Canada.”

By Reed’s measure, Canadian stocks are trading at 19 times earnings vs 13.5 for Europe. “Look at global markets at the bottom in March 2009,” he says. “All of them were off [by] roughly 45%-50%. Since then, Canada has been the strongest, and has about 15% to reach its 2007 peak.

“The EAFE index has about 55% to reach its peak,” he continues, “while the MSCI world index has about 45% to go. This explains why the multiples are lower [in EAFE markets]. We have not seen the price activity in Europe.”

Reed acknowledges that Greece’s economic troubles could be contagious and affect other peripheral European countries. But he also suggests the issue should be seen differently: “Greece accounts for 2.5% of the European economy, but [its economic woes are] seen as a huge problem. And that’s the perception that is keeping a lot of stocks at lower levels.”

In fact, valuations in Europe’s banking sector, for example, have been pushed to attractive levels. Although Reed has no exposure to European banks, he admits, “I am looking at a lot of different situations.”

Currently, about 63% of the Franklin Templeton fund’s AUM are in Europe, with about 37% in Asian markets.

Running a 63-name fund, Reed favours French drug companies such as Sanofi SA. “It’s the third-largest pharmaceutical company in Europe, by market cap, and the fifth-largest in the world,” says Reed, noting that the company markets consumer products such as Allegra and Selsun Blue shampoo, as well as drug treatments for heart and central nervous system diseases.

“We like the pharmaceuticals,” says Reed. “They’re not expensive, and the valuations are compelling.”

Sanofi stock is trading at around 14 times trailing earnings. Acquired more than five years ago, Sanofi shares are trading at about 55.35 euros ($77.50). Reed has no stated price target for Sanofina shares.

Within Asia, Reed favours China Mobile Ltd., the world’s largest cellphone company. China Mobile has 600 million subscribers and is growing by about five million new customers a month.

“It’s growing so fast because it was able to penetrate the mass market very early on and be price-competitive,” says Reed, noting that the firm has an 80% market share in China. Meanwhile, China Mobile also has begun to distribute BlackBerry smartphones, which are made by Waterloo, Ont.-based Research In Motion Ltd.

“[BlackBerrys are] not a huge part of [China Mobile’s] operation,” says Reed. “But, going forward, it has tremendous potential.”

Acquired about seven years ago, China Mobile stock is trading at 10.5 times trailing earnings and pays a 4.2% dividend. The Hong Kong-listed shares are trading at about HK$72.70 (C$8.75). IE