Valuations steer Templeton manager toward Europe

Peter Moeschter says banks such as HSBC and ING have rebounded strongly since the global financial crisis.

Sonita Horvitch 12 July, 2017 | 5:00PM
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Peter Moeschter, executive vice-president, Templeton Global Equity Group, at Franklin Templeton Investments Corp., says that the European economy is playing catch-up to that of the United States, which augurs well for those companies based in Europe with exposure to that market.

For a number of years, says Moeschter, "our research has led us into European stocks in both Templeton's global and EAFE (Europe, Australasia and Far East) portfolios." A traditional value manager, Templeton combs the global equity market for bargains, with its finely honed discipline, to assess the future financial prospects for companies and not overpay for these prospects.

"The outlook for stronger economic growth within Europe and elsewhere, coupled with the likelihood of modestly increasing interest rates, has been a positive for the all-important European financial-services sector," says Moeschter. Since the 2008 global financial crisis, he says, the European banks have been building their balance sheets and improving their operations.

"We were early buying into this sector in a significant way after the global financial crisis, when the European banks were in tough shape," he says. "Now we are reaping the benefit from the fact that they are on a sounder footing." European financial stocks have done well, he says, but the favourable macroeconomic outlook is helping to support the stocks' valuations.

Europe experienced a deeper economic crisis than the United States, says Moeschter. "It has also taken Europe longer to resolve its economic challenges, but, of late, the progress has been steady."

Reinforcing the better economic outlook for Europe is the markedly improved political backdrop in continental Europe, he notes. "Recent elections in both the Netherlands and France produced moderate, centrist governments that are supportive both of the European Union and the Eurozone." Also, the two main political parties in Germany, which will contest the upcoming election in September, are both pro-Europe and pro-euro, he says. Finally, "there is likely to be a softer Brexit than was earlier anticipated in recognition of the importance to the UK of its trade with the Continent."

The MSCI EAFE Index, which covers 21 developed markets in Europe and Asia, produced a strong total return of 20.8% in U.S.-dollar terms for the 12 months to the end of June. Among the top-performing sectors in this index over that period were financials with a total return of 38.9%, while health care was among the poorer performers with a total return of 5.2%. "These two sectors are emphasized in the Templeton EAFE portfolios," says Moeschter.


Peter Moeschter
Peter Moeschter

Looking at the valuation on the MSCI EAFE Index at the end of June, the price/earnings multiple on a trailing earnings basis was 19.1 times. The P/E multiple on the MSCI World Index, which includes the United States and Canada, was higher at 21.5 times.

Moeschter notes that while valuations on EAFE stocks are "not as cheap as they were a few years ago, there is still value to be found among these stocks for bottom-up value managers."

At Templeton, Moeschter, who has been with the firm for 20 years, is responsible for global and EAFE portfolios for institutional and retail clients. His EAFE mandates include Templeton EAFE Developed Markets, which he has managed for more than six years. In early February, Moeschter was appointed lead manager of Templeton International Stock. Templeton EAFE Developed Markets, which has about 60 holdings, is benchmarked against the MSCI EAFE Index.

Geographically, Templeton EAFE Developed Markets has approximately 75% of its holdings in companies based in Europe and the remaining 25% in Asia. Of its European holdings, the biggest weights are in Germany and the United Kingdom. In Asia, Japan represents roughly half of the 25% Asian weighting in the fund. (Japan, at 23.4% of the EAFE index at the end of June, is the largest single country weight.)

"We are finding some value in Japan and it continues to be an important part of our portfolio, with holdings in everything from staples, to mining to autos," Moeschter says. When it comes to sectors, the heaviest weights of Templeton EAFE Developed Markets are in financials, health care and energy.

The fund, he says, continues to have a large position in some major European banks including  HSBC Holdings PLC (HSBC). This multinational bank and financial-services company, based in London, has extensive business in the Asia-Pacific region. This reflects its Asian origins. In 1865, the bank opened its first branches in Hong Kong and Shanghai. "HSBC came through the financial crisis in better shape than most of its peers," says Moeschter. "At this point HSBC is benefitting from a pick-up in both Asian and European economic growth." The stock has a dividend yield of 5.5%.

Templeton EAFE Developed Markets also has a significant holding in the Amsterdam-based global financial-services company  ING Groep NV (ING) Moeschter says "ING was hit quite hard during the global financial crisis and its subsequent restructuring has included shedding its insurance business to concentrate on banking." The stock has a dividend yield of 4.3%.

HSBC Holdings PLC ING Groep NV
July 10 close $47.65 $17.90
52-week high/low $47.90-$31.00 $17.94-$10.26
Market cap $191.9 billion $69.5 billion
Total % return 1Y* 64.5 84.7
Total % return 3Y* 3.0 12.4
Total % return 5Y* 6.5 25.9
*As of July 10. All figures in U.S. dollars
Source: Morningstar

The European health-care sector has suffered, of late, says Moeschter, because of the uncertainty surrounding the likely shape of U.S. health-care legislation and its impact on the sector globally. "This weakness has enabled us to add to our holdings in this sector, at reasonable valuations."

Two major European-based health-care holdings are the Swiss multinational pharmaceutical company Roche Holding AG and Bayer AG, which is a German multinational pharmaceutical and agricultural products company.

"One of the largest pharmaceutical companies in the world, Roche is a leader in oncology and diagnostics, and valuation on the stock is reasonable," says Moeschter. Bayer is in the process of acquiring its U.S. rival  Monsanto Co. (MON), he says. "This acquisition will boost Bayer's exposure to seeds and to the overall market for agricultural products."

In the energy sector, Moeschter reports that energy-services stocks had a strong run from their lows in 2016 and the portfolio's holdings in these stocks were sold. "Energy is still a significant sector weight. The fund has kept its holdings in the major European integrated energy companies, such as Royal Dutch Shell PLC."

Consumer stocks remain expensive, says Moeschter. "But there are opportunities." Belgium-based Ontex Group NV, a manufacturer of personal hygiene products, including diapers for babies, is the largest holding in Templeton EAFE Developed Markets. Ontex "has a strong presence in Europe, but it is also expanding its reach in developing markets, including Mexico and Brazil," says Moeschter. The company has been making acquisitions in both countries, he says. "This will position it well for future growth and the valuation on the stock is reasonable."

Turning to utilities, Moeschter is highlighting innogy SE. Based in Germany, innogy owns regulated networks for electricity and gas distribution. "But it also has a business focused on renewable energy, including onshore and offshore wind power, which augurs well for earnings growth." The stock has a dividend yield of 4.6%.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
HSBC Holdings PLC8.65 USD-0.46
HSBC Holdings PLC ADR44.40 USD1.51Rating
ING Groep NV ADR17.69 USD1.35Rating

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Sonita Horvitch

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