In Europe, a Renaissance of Shareholder Value
In Paris--not to mention Bonn, Rome and Madrid--the answer these days is a resounding yes. And for foreign-stock mutual funds, that translated into great gains in the first quarter.
The average foreign stock fund tracked by Morningstar Inc. climbed 16.2% from Jan. 1 through last Friday, outdistancing even the robust gains in the U.S. stock market.
Foreign funds were paced by scorching advances in stock markets across Europe, as many companies there boosted earnings by restructuring operations and cutting costs, in preparation for the planned European monetary union, or EMU.
Also helping Europe’s markets: falling interest rates, tame inflation and--perhaps most important--a burgeoning American-style friendliness toward shareholders.
The result? France’s main market index was up 27.1% through Friday, measured in the native currency. Germany’s market jumped 20% and Britain’s 15.7%. Many smaller markets did even better. Spain leaped 41.1% while Italy zoomed 37.4%.
“European markets are exploding,” said David Harris, who manages the SteinRoe International and Emerging Markets mutual funds.
Many Southeast Asian markets also rallied in the quarter from their dismal lows reached in mid-January. But while foreign stock funds typically can invest anywhere outside the United States, their first-quarter results spring largely from Europe’s gains because many portfolio managers have been frightened out of Asia.
“There are a lot of [foreign] funds out there that are quasi-European funds because they’re scared of Asia, don’t like Japan and [think] Latin America is too small an area to put assets,” Harris said.
Investors shouldn’t expect such sparkling results from Europe every quarter, of course. Some managers, in fact, say those markets are ripe for a short-term pullback as investors digest their gains.
Helped by the first-quarter rally, returns in some European markets now exceed even the dramatic rise in the U.S. market since the mid-1990s. While the U.S. Standard & Poor’s 500 index has risen 135% since Jan. 1, 1994, Portugal’s market is up 233%, Spain’s is up 183% and Finland’s 176%.
European markets “are all overbought, especially the peripheral markets,” said Bill Wilby, manager of the Oppenheimer Global fund.
But he quickly added: “There’s a good chance Europe could be in a positive growth [phase] for several years with the combination of corporate restructuring and monetary union.”
EMU will result in a single currency for Europe, with the roll-out beginning Jan. 1. The plan calls for the scrapping of individual currencies and dismantling of trade barriers in favor of a unified economy across the Continent. The idea is to grease trade and eliminate currency swings that impede commerce.
The immediate effect has been a wave of governmental and corporate belt-tightening.
To qualify for EMU entrance, governments have had to pare budget deficits, reduce debt and bat back inflation. That discipline, in turn, has helped push down interest rates and spur economic growth in Europe.
Indeed, a major surprise this year has been the expansions in France and Germany, among other countries. (Asia’s economic woes may hurt Europe in coming months, but as in the United States, significant negative effects haven’t yet shown up.)
Companies, meanwhile, have prepared for increased competition under EMU by restructuring aggressively. They’re firing workers, selling off unprofitable lines and actively seeking merger partners, triggering a wave of corporate deals.
Some investors liken the trend to the one that fed the U.S. stock-market rally in the mid-1990s.
“Europe is five or 10 years behind the U.S. when it comes to corporate restructuring,” said Clas Olsson, co-manager of the Aim International Equity fund.
The shift represents a sea change for European companies, which have been notoriously slow-footed and indifferent to shareholders.
“For decades, and maybe forever, until about five years ago ‘making profits’ were dirty words,” said David Herro, manager of the Oakmark International fund.
To be sure, many European countries still have high taxes, expensive social-welfare systems, powerful labor unions and excessive regulation. And make no mistake, the governmental embrace of free trade and deregulation is far from universal.
The French, for example, elected a leftist parliament last year whose campaign platform included adding 350,000 public-sector jobs to boost employment.
“In France, the government is living in the Middle Ages,” Herro said.
Still, there are strong reasons why Europe’s markets may be in a long-term uptrend.
For one, low interest rates are coaxing traditionally conservative Europeans out of bank accounts and into stocks, similar to what occurred in the United States in the early 1990s.
“An equity culture is developing in Europe,” said Jean-Marie Eveillard, manager of the SoGen International fund.
Stocks’ valuations also are attractive. Many European multinational stocks have been trading at significant discounts to their American counterparts. Some industries--such as financials and drugs--have gotten a bit pricey, experts say. But compared with the U.S. market, values still abound, many fund managers say.
Among major European markets, Britain, Germany, France and Belgium have lagged the U.S. market’s gain since 1993.
In the United States meanwhile, large companies are at a crossroad because many have already lopped off excess costs. They now face the test of having to improve earnings by boosting sales.
Many European companies don’t yet have that problem. They’re still building the bottom line by restructuring and cost-cutting.
“There’s a lot more fat to be cut out of European companies than there is to be cut out of U.S. companies,” Wilby said.
“You can get huge margin gains in Europe with a little bit of cost-cutting and applying a bit of technology.”
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Flying on EMU’s Wings
The approach of European Monetary Union, or EMU, on Jan. 1, 1999, is driving economic change in Europe that helped send stock markets there soaring in the first quarter. How key markets fared in native currencies and in U.S. dollars (adjusted for currency shifts) in the quarter, and their gains in native currencies since Jan. 1, 1994:
First-quarter % change Gain since Country/index Native U.S. $ Jan. 1, 1994 Portugal/BVL-Gen. +47.0% +44.5% +233% Spain/IBEX-35 +41.1 +38.2 +183 Greece/ASE +39.5 +24.7 +115 Italy/MIB-30 +37.4 +34.3 +135 Finland/HEX-Gen. +32.1 +30.0 +176 Ireland/Overall +30.9 +26.4 +181 France/CAC-40 +27.1 +24.2 +68 Netherlands/AEX +24.9 +22.8 +175 Belgium/BEL-20 +23.4 +21.4 +103 Sweden/OMX +22.3 +23.0 +167 Switzerland/MI +20.2 +17.4 +155 Germany/DAX-30 +20.0 +18.1 +125 Britain/FTSE-100 +15.7 +18.3 +74 Denmark/KFX +15.6 +13.6 +128 Norway/OBX Total +8.2 +6.0 +125 U.S./S&P; 500 +12.9 +135
Note: All data through Friday; price changes only (not including dividends).
Source: Bloomberg News
* INTERNATIONAL FUNDS: Top-rated foreign funds. D15