Bargains beckon U.S. funds to Europe with S&P 500 past prime

U.S. Market

Europe’s increase in valuations compares with a 19% rise for U.S. shares and 35% drop in Japan, according to Bloomberg data. Even with the American multiple expansion this year, U.S. stocks can rally more, according to Wells Fargo Funds Management’s John Manley.

“The U.S. is in pretty good shape,” Manley, who helps oversee $233.6 billion as chief equity strategist for Wells Fargo Funds Management in New York, said in a Dec. 6 phone interview. “Valuations based on earnings in the U.S. are still fine. I think it’s still a very good stock market going forward.”

The euro area’s gross domestic product will expand 1% next year after two years of contraction, according to 47 economist forecasts compiled by Bloomberg. At the same time, the U.S., the world’s biggest economy, is projected to grow 2.6% and Japan, the third-largest, will increase 1.5%.

Global growth means more opportunities for stock investors still looking for bargains, as they can benefit from a pickup in those economies without having to buy U.S.-based companies only, according to Mark Luschini at Janney Montgomery Scott LLC, which oversees $60 billion. He’s buying Continental AG, the German auto-parts maker, as well as London-based Vodafone Group Plc, the second-largest wireless company, and the WisdomTree Japan Hedged Equity Fund.

Spreading Risk

“You can spread your risk around,” Luschini, chief investment strategist, said from Philadelphia in a Dec. 3 phone interview. “The reward for that risk-taking will be greater in non-U.S. equities.”

European banks trade at about 14.2 times projected earnings, compared with 16.1 for the region’s health care stocks and 27.6 for technology companies, according to data compiled by Bloomberg. To David Herro at Harris Associates LP relatively low valuations at companies such as Credit Suisse Group AG, the second-biggest Swiss bank, make them buys after the global equity-market rally this year.

The Zurich-based company, whose sales are split almost evenly between the Americas, Switzerland and the rest of the world, has a price-earnings ratio of 9.4, based on estimates.

Credit Suisse

Credit Suisse, forecast to boost earnings 25% next year, says it has already met a core equity capital ratio requirement before a 2019 deadline. It reported a common equity ratio of 10.2% under Basel III rules. That was the sixth- highest ratio among 14 global investment banks, according to data compiled by Bloomberg Industries.

“This is a stock which really is at a valuation that would indicate some kind of distressed level, when in fact the business is doing quite well,” Herro, who helps oversee about $106 billion as chief investment officer at Harris Associates in Chicago, said in a Dec. 4 phone interview. “The market still has it priced like it’s some volatile financial. Yes, they have an investment bank, but most of that has been de-risked.”

Continental, based in Hannover, Germany, has a price- earnings ratio of 12, even after it rallied 72% this year, more than five times the Stoxx 600. Europe’s second- largest auto-parts maker has beaten analyst earnings estimates the last four quarters and raised its profit forecast for 2013 on growth in China and North America.

Tricky Market

The manufacturer has sidestepped the effects of the region’s car-market contraction by adding sales to customers including Volkswagen AG and Bayerische Motoren Werke AG in growing markets such as China and the U.S. Continental gets 27% of its revenue from Europe outside Germany, 16% from North America and 14% from Asia, data compiled by Bloomberg show.

“They have a good balance of exposure, so in essence you’re not betting on any one company or area,” James Moffett, who oversees $10 billion in international assets at Scout Investments in Kansas City, Missouri, said in a Dec. 4 phone interview. “It’s both the earnings and the market pricing, which helps with the question of how do you try to play with what can be a tricky market next year.”

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