International equities markets have been turbulent, as Europe’s fiscal strains show little sign of letting up and China’s economy appears to be slowing. Although some managers of international equity mutual funds are confident that value remains in Europe, others are focusing on Far East markets, where, they say, opportunities are brighter.

“Europe is like a heart attack victim,” says David Ragan, manager of Mawer World Investment Fund and director with Calgary-based Mawer Investment Management Ltd. “It survived, but had an unhealthy lifestyle before. This gives it a chance to live a more healthy lifestyle and cut back on the over-spending. [European companies] needed this scare. Longer term, this is a positive — as long as they get discipline and stay that way.”

The current volatility reflects doubts about the economic rebound, as stimulus spending is being withdrawn: “All those levers being pulled will result in hiccups, mostly of a minor nature,” says Ragan, who shares fund management duties with Jim Hall, Mawer’s director of equity research.

“This should create some volatility. And, as usual, investors are overreacting. One economic statistic comes out, and the market moves [down by] 2%-3%,” Ragan says, noting the recent impact of weaker U.S. consumer spending on global markets.

He adds that some politicians have mandates to make needed spending cuts. “Ireland was one of the first to have problems, and it’s cutting back. Spain has been doing the same. Greece has been forced into it, but still hasn’t finished,” says Ragan, noting that the new coalition government in Britain has also made significant cuts. “But we do expect economies to bounce back and help mitigate that [government spending cuts] a little bit.

“Everyone expects Europe to be abysmal, and equities are pricing in abysmal growth,” Ragan continues. “It goes back to this: what are the expectations and where will the disappointments come from?”

As markets are focused on expectations, the news that China’s growth is slowing to single-digit levels has some investors worried, Ragan admits. Indeed, he describes Asia as one of the largest risks.

In particular, it’s unclear if China had been building unproductive assets and factories that had helped boost growth of its gross domestic product but which will eventually sit idle and lead to weaker growth.

From a strategic viewpoint, there is about 64% of the Mawer fund’s assets under management in Europe (vs 63% in the benchmark MSCI Europe, Australasia and Far East index), 15% in Asia (25%), 7% in Latin America (5%), 7% in Australia (6%), 2% in Africa (1%) and about 5% in cash.

Running a 54-name fund, Ragan and Hall have been buying in Europe, where the bad news is already priced into the market. Recently, they acquired Switzerland-based Roche Holding AG. A leading biotechnology firm, it manufactures so-called “biologi-cal” drugs for cancer treatment and is best known for Avastin used in the treatment of ovarian cancer.

Says Ragan: “This is a very established, very well-run company with great research capabilities.”

But Roche shares are down to 146 Swiss francs ($146.69), vs SFR170 when Ragan bought them early this year. Part of this drop can be attributed to the malaise in European markets, as well as to drug-pricing concerns of European officials.

“We don’t think the longer-term outlook has changed,” Ragan says. “In fact, we recently added to the position. If we liked it at SFR170, we like it even more at SFR146.”

Ragan also likes Britain-based Intertek Group PLC, which provides testing, inspection and certification services around the world.

“The brand damage that someone risks by not spending a few thousand dollars on a product or service is immense,” says Ragan, noting that among other clients, Intertek had worked with Rolls-Royce Group PLC to test the effects of volcanic ash on jet engines.

Intertek is the third-largest firm in its field, and has a 41% return on equity. Ragan expects the firm will grow through acquisition and more outsourcing of its services.

Although there is no stated target, Ragan anticipates further upside as the market recognizes Intertek’s ability to compound capital. Acquired two years ago, its shares are trading at about 1,435 pence ($2.30) each.



Markets are now focused on deflation and the poor fiscal condition of many European countries, says Manraj Sekhon, manager of Mackenzie Universal International Stock Fund and head of international equities at London-based Henderson Global Investors Ltd.

“It’s another phase of this disinflationary, deleveraging period that started in 2008,” he says. “It started with balance sheets, and it’s still about balance sheets. Be they consumer, corporate, bank or sovereign balance sheets, [the markets] focusing on balance sheets remains the case.”

Sekhon believes that government spending cuts in Europe will result in some pain, in the form of layoffs and reduced consumption: “Europe will continue to go through a period of fiscal austerity and retrenchment. This means de-leveraging will continue, and consumption will suffer as well. There will be fairly low economic growth for the short to medium term.”
@page_break@Although Sekhon is cautious about Europe, that doesn’t mean the entire market will suffer. That is, although the MSCI Europe index is down by about 10%-12% year-to-date, markets such as Germany are up slightly or flat, in euro terms. “Germany is filled with high-quality exporters focused on markets outside Europe,” he says, noting that the weak euro is helping exports.

Yet Sekhon is more optimistic about the growth prospects of the Far East and the emerging economies. “We have been meaningfully overweighted in Asian and emerging markets companies, and meaningfully underweighted in Europe over the past 18 months — and we continue to be.”

A growth investor, Sekhon also likes to focus on the quality of the macroeconomic environment. “The challenge put before us in 2008 was about balance sheets. Whether it concerns consumers, corporations, banks or governments, they are, in most cases, stronger in Asia and emerging markets,” says Sekhon, noting that the big story is about growing domestic demand as opposed to exports.

“When you have strong balance sheets, domestic demand is stronger. Companies are in a better position to invest, and governments are able to conduct their fiscal investments and withstand any pressures from a retrenching environment in major Western economies.”

From a geographical viewpoint, Sekhon has about 32% of the Mackenzie fund’s AUM in Asian and emerging markets. There is also 21% in Japan, 25% in Europe and 21% in Britain.

Running a 50-name fund, Sekhon likes firms such as Essar Energy PLC. A London-listed developer of mainly coal-fired power projects in India, Essar is benefiting from a major push to expand that country’s energy infrastructure.

“[Essar] is growing its power output capacity by a factor of nine between now and 2014,” says Sekhon, noting that the firm will raise its capacity from 1,200 megawatts to around 11,000 megawatts.

The Mackenzie fund bought into Essar’s IPO in April, at 420 pence. The stock recently was trading at about 465 pence.

“This is a multi-year growth story that focuses on one of the most exciting investment themes we’ll see for some time,” says Sekhon. His target for Essar’s stock price is 550 pence within about 12 months.

Another favourite is Genting Singapore PLC, a casino operator based in Singapore. The firm recently opened a lavish new casino that functions within a so-called “integrated” resort that includes theme parks and conference facilities. With government approval, a competitor has built a similar resort complex. Says Sekhon: “[Genting is] among the most profitable gaming venues in the world.”

The Mackenzie fund bought Genting stock a year ago at about S70¢ (53¢), and the stock is trading at about S$1.15. Sekhon’s 12-month share price target is S$1.30.



Despite Europe’s travails, Don Reed, manager of Templeton International Stock Fund and president and CEO of Toronto-based Franklin Templeton Invest-ments Corp., is bullish on the region.

“There is a tremendous amount of opportunity,” says Reed. “I’m not concerned about short-term performance, one way or the other, although it is better to be on the side of the angels. I’m feeling good about our portfolio.”

Reed notes that valuations are attractive and the benchmark MSCI EAFE index is trading at a price/earnings ratio of 18.3, or below the 10-year average of 19 times earnings. (The Templeton fund is trading at a P/E of 15.) Reed says that many European markets are trading at discounts to the index: “The [British market] is trading at 13.3 times earnings, France is at 16.8 times, Switzerland is 17.9 and Spain is at 10 times.”

Although the European macroeconomic environment looks bleak, Reed is focused on its cheaper valuations: “It’s a common-sense thing: where do you find cheap stocks? Answer: in cheap markets.”

A bottom-up, value-style investor, Reed does not adhere to index weightings. As a result, there is an overweighted 69.6% of the Templeton fund’s AUM in Europe (including an overweighted 24.2% in Britain). There is an underweighted 22.9% in Asia, single-digit holdings in Latin America and South Africa, and 2.3% in cash.

From a sector viewpoint, Reed favours oil and gas stocks (10.7% of the Templeton fund’s AUM), telecommunications (9.5%), pharmaceuticals (6.5%), media (5.8%) and industrials (5.7%), with smaller holdings in sectors such as insurance and aerospace and defence.

One favourite industrial stock in the 65-name Templeton fund is Vestas Wind Systems A/S. A leading provider of wind power, this Denmark-based firm has a 33% global market share. The Templeton fund bought the shares in Vestas in 2003 at around 109 Danish kroner ($19.85) and saw its shares rise to DKK650 in 2008. The Templeton fund has taken some profits but remains invested even though Vestas’ stock plummeted to around DKK100, on concerns about falling government subsidies. Says Reed: “We thought this was unwarranted.”

More important, the Templeton fund has stayed the course, on the expectations that wind-turbine technology is improving and the market is growing rapidly. Vestas stock is now trading at about DKK260, or 15.2 times earnings. Reed has no stated target, although he argues, “It’s still good value. Costs are coming down and turbines are more efficient. Wind power is a growth business.”

Reed also likes Randstad Holdings NV. A leading staffing firm, Randstad has about 5,400 offices worldwide. Once a high-flier, Randstad’s stock crashed in 2008. “Markets always overdo it on the downside as well as the upside, and the stock overdid it on the downside,” says Reed. “We like the concept of filling staffing needs.”

The Templeton fund bought Randstad stock at about 15.4 euros ($20.90) in April 2009; the price has risen to about 30.7 euros. The stock is trading at 16 times earnings, or two times price-to-book value. “It’s still good value on a fundamental basis,” says Reed, who has no stated target.

IE