By Nick Markola CIMA®
2012 turned out to be a lot better than most predicted this time last year. We are grateful the Mayan’s and their calendar skills were subpar.
2012 was a centennial year for Albanians with global commemorations and many great events. Centennial events reminded us all of our rich history, great accomplishments, of centuries of all struggles and victories and of our European roots. We should always celebrate our rich history and traditions, but always remember that we need to work hard and smart to achieve even more in the future. Each one of us should give our contribution. In my view, it is important for all of us to invest wisely, create a strong society of successful investors in various fields globally, starting from the United States to Europe and as far as Australia. Having strong investor portfolios on individual basis provides for our families. It further provides for the common good and gives us all more leverage. As 2012 is winding down, taking a closer look at our portfolios and positioning them for 2012 is prudent. Europe, despite all of its woes, maybe a good place to consider investing. Exploring going back to our roots, going back to Europe, always makes sense.
In positioning investment portfolios for the coming year, Wall Street professionals and investors are looking across the globe. There are walls of worries about the Fiscal Cliff and deficits in the US, sovereign debt in Europe, soft or hard landing in China, commodity crisis in Latin America and the nuclear issues in the Middle East, just to name a few. However, there are also investment opportunities throughout the world investors can capitalize on despite the challenges. Europe has been in the news extensively. Images of rioting folks in Greece or workers demonstrating in Italy, France or Spain may be fresh in our minds. There are arguments that Europe has entered into a depression and that may lead some to argue why considering investing in an area, in or on the brink of depression may profitable. They may argue for investments in economies that are growing at healthy rates.
For starters, it is very important to draw a clear distinction and delineation between economies and stock markets. While the performance of economies and markets may coincide during some periods, it is crucial to understand that often their performance diverges and goes in opposite direction. In support of this, one should look at the US in 2012. GDP growth has been anemic, but the equity markets have been very strong, returning well over 10%. China’s growth in the past has been very strong but equity markets have not. Brazil’s economy has grown at attractive rates but the equity market has not behaved the same. If one needs more evidence to understand that economic growth and stock market performance don’t behave the same way, a look at Europe in 2012 is a case in point. The European economy put up negative growth, while equity markets across Germany, France and UK were up in double digits with the Pan European Stoxx Europe 600 Index up almost 20%.
Debt crisis is still raging in Europe and some of the European governments are in very difficult financial situation. However, some European companies, unlike their government, are in much better financial position and flush with cash. Barron’s reports that companies in the Stoxx Europe 600 Index, had approximately €600 billion ($800 billion) in cash at the end of 2011, substantial increase from the €540 billion at the end of 2007, according to data from Thompson Reuters Eikon. Approximately a third of the companies in the index are currently debt free which means that they have plenty of cash on the sidelines waiting to be deployed. Corporate earnings are further forecasted to rise by 5% to 10% in 2013. Price to earnings multiples, a frequently used measure to analyze investments, have significantly improved in 2012 for European companies. The real catalyst for such an improvement may be the actions of the European Central Bank (ECB). The ECB tried on numerous occasions in the past to deal with the crisis but not with much access. Over the summer, it appears that the markets were encouraged with the actions and comments of the ECB President Mario Draghi that they will spare no measure and will do everything possible to deal with the European debt crisis. The July 2012 pledge by Mr. Draghi that they will do “whatever it takes” appears to have soothed the market participants in Europe.
With the negative news out of Europe and with the recession then potential depression, many European companies have suffered. There are still risks in Europe, especially on the political side. Political risks have somehow diminished but Greece is still a mess. Italy has significant issues to deal with, and Spain and Portugal are on the brink of needing rescue packages. France also has real issues. There has been a lot of chatter about austerity measures in Europe, however, a closer look at government budges reveals anything but austerity as expenses aren’t reined in while spending has increased. The US has seen real issues in getting just two political parties to agree on anything meaningful. Therefore, getting all the European governments to agree on anything meaningful is a challenge.
One of the important tenets of investing is that one should always look for good investments. A more important tenet is to look for good investments in bad places because most will shy away difficult environments. Europe may be considered anything but a good investment place for many, but it is where our roots are. Going back to our roots always makes sense. Some of the companies in Europe I am contemplating on taking a closer look at are the German chemicals producer, Bayer; Swiss luxury goods maker Richemont; Danish drug maker, Novo Nordisk or the Spanish utility Enagas. Investing in stocks is always risky. Taking a closer look at companies in places such as Europe which is going through challenging times from an economic standpoint may provide attractive opportunities in 2013. It will provide an opportunity to go back to our roots and possibly generate attractive returns in this turbulent world.
With best wishes for a wonderful Holiday Season and a happy, healthy and prosperous New Year, be well and invest wisely.
* The writer is the Co-Founder of APEN