Europe funds bet that profits will rebound in US
Thursday, 25 October 2007
Alexis Xydias and Michael Tsang
Just when many investors are acknowledging the sudden swoon of U.S. stocks as the sign of a market top, some of Europe's biggest money managers are anticipating a profit rebound for American companies and slowing earnings growth at home.
While analysts say corporations in the Standard & Poor's 500 Index are poised for their first quarterly decline in earnings since 2002, Fortis Private Banking, New Star Asset Management and CCLA Investment Management, which together oversee $127 billion, are looking forward to faster growth next year. The weakening dollar and lower interest rates give U.S. companies the advantage.
Analysts boosted 2008 U.S. estimates to 12 percent in the past two months, and cut those for Europe to 11 percent, according to data compiled by Bloomberg. The last time American companies grew faster was in 2004, according to Bloomberg and Zurich-based UBS AG, the world's biggest money manager.
``We see a good earnings evolution in the U.S., where most negative news has been priced in the market,'' said Guillaume Duchesne, a Luxembourg-based equity strategist at Fortis, which oversees $76 billion. ``In Europe expectations are high so the risk of bad news is more important.''
Fortis raised its allocation for American stocks to ``overweight'' for the first time in more than a year and cut its holdings in Europe, Duchesne said.
Stocks in the U.S. rose for the first time in three days today after Bear Stearns Cos. got a $1 billion investment from China and investors speculated technology companies will report better-than-forecast earnings. The Standard & Poor's 500 Index gained 0.4 percent to 1,506.33 at the 4 p.m. close in New York.
American shares rebounded from earlier losses that sent Europe and Asia lower after the Group of Seven finance ministers and central bankers said the turmoil in the credit markets will slow economic growth. The Dow Jones Stoxx 600 Index of European companies lost 1.3 percent to 375.82, the biggest slide in a month. The Morgan Stanley Capital International Asia-Pacific Index retreated 2.2 percent to 162.17.
The U.S. bulls already had a dose of bad news last week. The S&P 500 fell 3.9 percent to 1,500.63, the biggest decline since July, after Federal Reserve Chairman Ben S. Bernanke said the worst housing slump in 16 years may continue through 2008. Companies from Bank of America Corp. in Charlotte, North Carolina, to Peoria, Illinois-based Caterpillar Inc., the world's largest maker of bulldozers and dump trucks, reported third- quarter earnings below analyst forecasts.
Caterpillar, a beneficiary of the declining dollar, said in a statement the U.S. economy will be ``near to, or even in, recession,'' next year, nullifying the effects of booming sales abroad.
Stocks in the S&P 500 traded at 18 times earnings this month, the most expensive compared with Europe's Stoxx 600 since 2005, where shares were valued at an average 13.9 times profit. The Stoxx 600 declined 2.5 percent last week to 380.88, its biggest drop since the first week of September.
U.S. valuations are too high for Thomas Schuessler, a fund manager at DWS Investments in Frankfurt who helps oversee $381 billion.
``While the U.S. has become more attractive, the tricky part is how low will the dollar go,'' said Schuessler. ``The stock market may do better, but you lose it on the currency. For a European investor the S&P 500 is not really attractive.''
The S&P 500's 6.2 percent gain this year turns into a loss of 1 percent for euro-based investors after taking into account the dollar's 6.9 percent decline this year against the currency shared by 13 European nations. The dollar fell to a record low of $1.4348 against the euro today, before strengthening in the wake of today's U.S. share advance.
U.S. earnings may get a boost as the dollar makes American goods more competitive, analysts' estimates compiled by Bloomberg suggest. Analysts raised their 2008 forecasts for S&P 500 profit gains to 12.2 percent from 11.3 percent in the past two months, Bloomberg data show. They also cut their growth estimates for companies in the Stoxx 600 to 10.9 percent from 11.6 percent.
The likelihood the Fed will reduce its target rate for overnight loans between banks to 4.25 percent from 4.75 percent by year-end rose to 74 percent last week from 15 percent a week earlier, according to fed fund futures. The European Central Bank has raised its key interest rate eight times to 4 percent from 2 percent in November 2005.
A Merrill Lynch & Co. survey of investors overseeing $671 billion found those planning to boost European holdings fell to 11 percent in October from 20 percent, while 21 percent may put more money in the U.S.
The poll of 209 managers between Oct. 5 and Oct. 11 showed 1 percent expect Europe, excluding the U.K., to produce the best profit growth. That's the lowest since 2005. Last month, 23 percent said the region had the best prospects. Investors cited interest-rate increases by the ECB as one reason for turning less bullish on European equities.
``Investors have priced in continuous strong growth in Europe and momentum is fading,'' said Gregor Logan, co-chief investment officer at New Star in London. ``In the U.S., there is much less growth but hopefully momentum is about to turn.''
The firm, which runs $41 billion, has increased U.S. shares in its Global Equity Fund by 17 percent to 46.4 percent since July and reduced German, Italian and Swiss stocks to 7.8 percent. New Star added New York-based Merrill, Lehman Brothers Holdings Inc. and Bear Stearns Cos., fund documents show.
``The U.S. economy will be held back by the housing market, but investors should focus on those American companies that have strong business models and that will benefit from overseas demand,'' said James Bevan, who helps manage $10 billion as chief investment officer for CCLA Investment Management in London. ``European exporters will suffer.''
Bevan bought shares of Santa Clara, California-based Applied Materials Inc., the biggest maker of semiconductor-production equipment, and Qualcomm Inc., the second-largest manufacturer of mobile phone chips, in San Diego.
He sold London-based Cadbury Schweppes Plc, the world's biggest candy company, and Amsterdam-based Wolters Kluwer NV, Europe's largest tax and legal publisher. The U.S. accounted for 38 percent of Cadbury's sales in 2006, while Wolters Kluwer got almost half of its revenue from North America, according to Bloomberg data.
Stockholm-based Ericsson AB, Royal Philips Electronics NV in Amsterdam and SAP AG in Walldorf, Germany, posted lower-than- estimated profits last week. SAP's Chief Executive Officer for the Americas Bill McDermott, in an interview, called the dollar's drop against the euro ``brutal'' for sales in the U.S., the company's biggest market.
``These European companies are hurting,'' said Lincoln Anderson, who oversees $150 billion as chief investment officer of LPL Financial Services in Boston. LPL cut its international stock holdings to 10 percent from 20 percent in the past year, boosting the firm's U.S. allocation to 90 percent.
Simon Melluish, who helps oversee $4.5 billion at Gartmore in London, bought shares in Chicago-based Boeing Co., the world's second-biggest maker of commercial aircraft, and Oak Brook, Illinois-based McDonald's Corp., the largest restaurant company.
``When we look around for truly global multinational names that are benefiting from dollar weakness, you get that in large U.S. companies,'' said Melluish. ``We can find better valuations in Europe, but where we can find companies that aren't crazy valued and are getting good growth rates, we are happy to buy.''
Bloomberg
Just when many investors are acknowledging the sudden swoon of U.S. stocks as the sign of a market top, some of Europe's biggest money managers are anticipating a profit rebound for American companies and slowing earnings growth at home.
While analysts say corporations in the Standard & Poor's 500 Index are poised for their first quarterly decline in earnings since 2002, Fortis Private Banking, New Star Asset Management and CCLA Investment Management, which together oversee $127 billion, are looking forward to faster growth next year. The weakening dollar and lower interest rates give U.S. companies the advantage.
Analysts boosted 2008 U.S. estimates to 12 percent in the past two months, and cut those for Europe to 11 percent, according to data compiled by Bloomberg. The last time American companies grew faster was in 2004, according to Bloomberg and Zurich-based UBS AG, the world's biggest money manager.
``We see a good earnings evolution in the U.S., where most negative news has been priced in the market,'' said Guillaume Duchesne, a Luxembourg-based equity strategist at Fortis, which oversees $76 billion. ``In Europe expectations are high so the risk of bad news is more important.''
Fortis raised its allocation for American stocks to ``overweight'' for the first time in more than a year and cut its holdings in Europe, Duchesne said.
Stocks in the U.S. rose for the first time in three days today after Bear Stearns Cos. got a $1 billion investment from China and investors speculated technology companies will report better-than-forecast earnings. The Standard & Poor's 500 Index gained 0.4 percent to 1,506.33 at the 4 p.m. close in New York.
American shares rebounded from earlier losses that sent Europe and Asia lower after the Group of Seven finance ministers and central bankers said the turmoil in the credit markets will slow economic growth. The Dow Jones Stoxx 600 Index of European companies lost 1.3 percent to 375.82, the biggest slide in a month. The Morgan Stanley Capital International Asia-Pacific Index retreated 2.2 percent to 162.17.
The U.S. bulls already had a dose of bad news last week. The S&P 500 fell 3.9 percent to 1,500.63, the biggest decline since July, after Federal Reserve Chairman Ben S. Bernanke said the worst housing slump in 16 years may continue through 2008. Companies from Bank of America Corp. in Charlotte, North Carolina, to Peoria, Illinois-based Caterpillar Inc., the world's largest maker of bulldozers and dump trucks, reported third- quarter earnings below analyst forecasts.
Caterpillar, a beneficiary of the declining dollar, said in a statement the U.S. economy will be ``near to, or even in, recession,'' next year, nullifying the effects of booming sales abroad.
Stocks in the S&P 500 traded at 18 times earnings this month, the most expensive compared with Europe's Stoxx 600 since 2005, where shares were valued at an average 13.9 times profit. The Stoxx 600 declined 2.5 percent last week to 380.88, its biggest drop since the first week of September.
U.S. valuations are too high for Thomas Schuessler, a fund manager at DWS Investments in Frankfurt who helps oversee $381 billion.
``While the U.S. has become more attractive, the tricky part is how low will the dollar go,'' said Schuessler. ``The stock market may do better, but you lose it on the currency. For a European investor the S&P 500 is not really attractive.''
The S&P 500's 6.2 percent gain this year turns into a loss of 1 percent for euro-based investors after taking into account the dollar's 6.9 percent decline this year against the currency shared by 13 European nations. The dollar fell to a record low of $1.4348 against the euro today, before strengthening in the wake of today's U.S. share advance.
U.S. earnings may get a boost as the dollar makes American goods more competitive, analysts' estimates compiled by Bloomberg suggest. Analysts raised their 2008 forecasts for S&P 500 profit gains to 12.2 percent from 11.3 percent in the past two months, Bloomberg data show. They also cut their growth estimates for companies in the Stoxx 600 to 10.9 percent from 11.6 percent.
The likelihood the Fed will reduce its target rate for overnight loans between banks to 4.25 percent from 4.75 percent by year-end rose to 74 percent last week from 15 percent a week earlier, according to fed fund futures. The European Central Bank has raised its key interest rate eight times to 4 percent from 2 percent in November 2005.
A Merrill Lynch & Co. survey of investors overseeing $671 billion found those planning to boost European holdings fell to 11 percent in October from 20 percent, while 21 percent may put more money in the U.S.
The poll of 209 managers between Oct. 5 and Oct. 11 showed 1 percent expect Europe, excluding the U.K., to produce the best profit growth. That's the lowest since 2005. Last month, 23 percent said the region had the best prospects. Investors cited interest-rate increases by the ECB as one reason for turning less bullish on European equities.
``Investors have priced in continuous strong growth in Europe and momentum is fading,'' said Gregor Logan, co-chief investment officer at New Star in London. ``In the U.S., there is much less growth but hopefully momentum is about to turn.''
The firm, which runs $41 billion, has increased U.S. shares in its Global Equity Fund by 17 percent to 46.4 percent since July and reduced German, Italian and Swiss stocks to 7.8 percent. New Star added New York-based Merrill, Lehman Brothers Holdings Inc. and Bear Stearns Cos., fund documents show.
``The U.S. economy will be held back by the housing market, but investors should focus on those American companies that have strong business models and that will benefit from overseas demand,'' said James Bevan, who helps manage $10 billion as chief investment officer for CCLA Investment Management in London. ``European exporters will suffer.''
Bevan bought shares of Santa Clara, California-based Applied Materials Inc., the biggest maker of semiconductor-production equipment, and Qualcomm Inc., the second-largest manufacturer of mobile phone chips, in San Diego.
He sold London-based Cadbury Schweppes Plc, the world's biggest candy company, and Amsterdam-based Wolters Kluwer NV, Europe's largest tax and legal publisher. The U.S. accounted for 38 percent of Cadbury's sales in 2006, while Wolters Kluwer got almost half of its revenue from North America, according to Bloomberg data.
Stockholm-based Ericsson AB, Royal Philips Electronics NV in Amsterdam and SAP AG in Walldorf, Germany, posted lower-than- estimated profits last week. SAP's Chief Executive Officer for the Americas Bill McDermott, in an interview, called the dollar's drop against the euro ``brutal'' for sales in the U.S., the company's biggest market.
``These European companies are hurting,'' said Lincoln Anderson, who oversees $150 billion as chief investment officer of LPL Financial Services in Boston. LPL cut its international stock holdings to 10 percent from 20 percent in the past year, boosting the firm's U.S. allocation to 90 percent.
Simon Melluish, who helps oversee $4.5 billion at Gartmore in London, bought shares in Chicago-based Boeing Co., the world's second-biggest maker of commercial aircraft, and Oak Brook, Illinois-based McDonald's Corp., the largest restaurant company.
``When we look around for truly global multinational names that are benefiting from dollar weakness, you get that in large U.S. companies,'' said Melluish. ``We can find better valuations in Europe, but where we can find companies that aren't crazy valued and are getting good growth rates, we are happy to buy.''
Bloomberg