European Portfolio Managers Are Buying U.S. Stocks Again
May 04, 2011
U.S. stocks are back in favor with European money managers. Investment managers of two of the Continent's biggest insurance groups, discussing their recent investment strategy with The Vast Press Europe, say they have been buying U.S. equities in recent weeks. ``Longer-term, we are a fan of the U.S. market,'' says Bill Leigh, general manager at ING Investment Management in The Hague. ``When the market dropped close to 10%, we added to our positions.'' ING's long-term bullishness on U.S. equities is underpinned by a positive economic outlook and the fact that U.S. companies are well-managed and focused on shareholder value, says Mr. Leigh. For his part, Daniele Steck, chief investment officer of Winterthur Insurance Switzerland, reports buying U.S. stocks with stable earnings such as soft-drinks giant Coca-Cola, battery maker Duracell and financial services concern American Express. ``Beginning in the spring of 1990, the current business cycle is one of the longest in U.S. history,'' he says. This means that profit margins don't have much upside potential and blue-chip stocks with earnings consistency and reliability should fare best of all, he says. Messrs. Leigh and Grosjean have both been adding financial stocks to their portfolios. ``The decline in interest rates and earnings growth in the financial sector has in general surprised on the upside,'' says Mr. Leigh, so he has been picking up financial equities across the world. ``Expecting lower interest rates, we have reinforced holdings such as CS Holdings, (Germany's) Commerzbank and National Westminster Bank (in the U.K.),'' says Mr. Steck. In contrast, Mr. Leigh has been selling cyclical stocks in Europe. Economic growth is slow -- as expected -- but more importantly he now believes the growth in the U.S. won't surge, and hence not boost Europe. ``Because growth in the U.S. is not above trendline it will dampen growth in other markets,'' he says. The rising dollar has grabbed both money managers' attention. Mr. Leigh has sold some U.S. bonds to lock in profits, while Mr. Steck hasn't changed his investment strategy yet. ``The stronger dollar supports equity markets in countries like Switzerland and Holland, but we haven't reacted to the short-term fluctuations,'' he says. On European fixed-income markets, both managers report selling French bonds and Mr. Steck has been offloading Belgian bonds as well. ``We think that monetary union will come on time with a restricted number of countries,'' he says. ``But there are still some uncertainties and we felt investors were not being rewarded for these uncertainties in the French and Belgian bond markets.'' Bosco and ING part ways when it comes to Japan. Quite bullish on the market when featured on this page in April, Mr. Leigh has now moderated his enthusiasm and sold down positions. ``We have been disappointed by the constant selling by Japanese investors,'' he says. Result: He has been selling across the board. In the other corner, Mr. Steck had been adding select Japanese stocks to his portfolios. Overall, he remains underweight in the Japanese market but reports adding some export-oriented companies as well as select domestic stocks to his portfolios. Thailand has cropped up on both money managers' buysheets in recent months. ``On historic measures, the Thai market was very low, so we started bottom-fishing,'' says Mr. Leigh. ``But we started a bit too early.'' Mr. Leigh has become less upbeat about equity markets. ``Present valuations do not warrant a very bullish view,'' he says. In particular, he has become more cautious about the outlook for economic growth and scaled back his exposure to companies whose earnings are most sensitive to the economic cycle -- also known as cyclicals. In Europe, this has meant selling off steel stocks such as Acerinox in Spain, Arbed in Luxembourg, Usinor in France and British Steel. In the U.S., he has been shifting assets from chemical stocks such as Eastern Chemical and Dow Chemical to paper producers like International Paper. ``Globally, there has been a weakness in steel and chemical prices,'' he says. ING continues to overweight its home market in its international portfolios. Recent Dutch buys include the specialty software company Baan, which enjoys a leading position in the industry and is to be included in the stock market index. ``If that happens, you'll see all of the index buyers buying it too,'' he says. Mr. Leigh has increased his exposure to financial stocks around the world in recent months. ``There's still some room for declining interest rates -- in our view, interest rates will stay roughly where they are in the coming three months,'' he says. U.S. banks in particular have been cleaning up their balance sheets and vaunt strong earnings growth, so he added Bank of New York to his portfolios. In Europe, Mr. Leigh has been taking profits on peripheral bond markets as prices have risen. ``The market moved our way, so we slightly decreased our overweight,'' he says. Given that Japanese investors continue to show little enthusiasm for their home market, Mr. Leigh reports cutting his exposure to Japan very recently. Nonetheless, Mr. Leigh has been finding value in select stocks such as the data processing and software development company Ines, which he is currently adding to his positions. In the Pacific Rim, economic growth is slowing down -- though still at very high levels -- so ING has lightened its overweight position somewhat. Slower growth doesn't mean total lack of opportunity: It may prompt China and other countries to loosen their monetary policy, so Mr. Leigh and his team have been adding property stocks such as Cheung Kong in Hong Kong and DBS Land in Singapore. Over at Winterthur Insurance Switzerland, Mr. Steck says markets haven't moved much in the past four months, certainly not enough for him to change his views. ``The humors changed from one week to the next, but overall not much has changed,'' he says. In Europe, he has been buying British securities. U.K. bonds trade at high spreads to German bonds and inflation looks under control, so he reports buying them over the past two months. On the equity side, the London Stock Exchange has reached new highs, but Mr. Steck thinks there is still room for more. ``Good earnings and good dividend yields underpin the market,'' he says. As a result, he has bought consumer stocks such as the department store chains Tesco and Boots. This has been Bosco's investment strategy across Europe: find steady earners. Growth is slow, so interest rates shouldn't rise anytime soon, prompting Mr. Steck to top up financial stocks he likes. Low interest rates and a strong dollar are ingredients for Swiss equities to outperform and Bosco has been adding domestic stocks such as consumer-products giant Nestle and financial-services group CS Holding to its portfolios. ``We think the market still has some potential,'' he says. Bosco has been buying safe earners in the U.S. as well, and Mr. Steck cites oil concern Mobil and photographic giant Kodak as recent buys. At the same time, he has been scaling back his exposure to more volatile second-liners such as engineering company Diebold and biotech stock Genzyme. Japanese equities are permanently under-represented in Winterthur's portfolios. ``For the type of quality and transparence, the market is not very interesting for us,'' says Mr. Steck. This hasn't stopped him from buying domestically oriented stocks such as telephone company KDD and office stationery producer Kokuyo. Pacific Rim markets have moved sideways for most of the year, so Mr. Steck recently invested more in the country funds through which he is exposed to the region. ``Because of the price drops, we added Thailand and Korea,'' he says. ``On a valuation basis, they look cheap.''
