Grantham and Faber legging into Europe as values begin to proliferate
My thesis at the start of the year was that European equities would outperform despite the sovereign debt crisis because of relative value vis-a-vis the United States. It seems that Jeremy Grantham and Marc Faber agree with those sentiments as both have recently recommended carefully adding positions in Europe.
When I last updated you in April on how my 2012 predictions were tracking, this one was not tracking. It is still not tracking as the ISHS MSCI Europe is about flat year to date, down 1.8%. Meanwhile, the S&P500 is up 7.4% for a differential at mid-year of about 9%. I still like European equities over US shares on a valuation basis though and believe Grantham and Faber give good explanations as to why legging into Europe with accumulated cash is a good idea as stocks fall.
Grantham told Investment Week there will be multiple entry points to buy EU equities:
"The good news is that equity valuations are attractive in many regions, particularly the eurozone," he said.
"We anticipate taking advantage of these low valuations in the coming months, but slowly as the ride will be uneven and we believe will likely present multiple entry points."
GMO’s chief investment officer said actions from politicians had prevented the crisis worsening in Europe, but he warned consumers were still spooked over the slowdown, casting a shadow over growth prospects.
"We appear to have entered a phase this year where spending cuts and tax increases have eroded consumer spending power, pushing most European economies into recession," Grantham said in his Q2 update.
This has already produced a political backlash demonstrated by the fall of the Dutch government, the success of outsider political parties in Greece, and the election of a Socialist president and parliament in France.
As a result, and while he remains more positive on equity markets, Grantham predicted European demand will remain weak overall, "as structural changes unnerve consumers."
Again, this is a value or relative value story not a market bull story. Same with Marc, who according to City Wire breaks habit of a lifetime and loads up on European equity:
Having liquidated a large portion of investment in Asian equities in the last few weeks, Faber has put the cash to work in Europe, while still holding 30% cash which he will allocate only when markets fall further, he said.
‘For the first time in my life, I have been buying European stocks because I can see the markets of Portugal, Spain, Italy, Greece and France near the March 6th 2009 lows,’ Faber said speaking from his home in Thailand.
‘These markets, compared to the rest of the world are very cheap and some stocks are perfectly fine companies but because these markets were very weak and because there is a threat of a euro break-up, everything has come down to very low valuations.’
Faber said he would currently still rather hold European stocks than US stocks – despite a possibility that the latter will see a rise in the S&P index to highs as seen in April this year.
‘I think that it’s possible that the US stocks may rally as the whole world thinks that the US has natural gas and there is a re-industrialisation in America. But, if I look at all the options I now have, I can see that European stocks are now terribly depressed.’
‘I still keep a lot of cash because if the markets drop another 30% – which I hope they will do – I will then invest in equities.’
The bottom line here is that we are in the late stages of a cyclical bull market within a larger secular bear market. That means sector rotation and defensive strategies with lots of cash and alternative investments have to predominate. My view is that the rotation out of the US should be beginning right about now as corporate earnings fall.