Templeton Growth manager looks beyond the headlines in Europe

Company fundamentals outweigh Brexit fallout, says James Harper.

Diana Cawfield 18 May, 2017 | 5:00PM

James Harper, lead manager of the value-style Templeton Growth, says he and his colleagues are looking beyond the negative news headlines overseas to find undervalued companies from a longer-term perspective.

"If you look at the European equity market relative to the U.S.," says Harper, executive vice-president, portfolio manager and research analyst at Templeton Global Equity Group in Nassau, Bahamas, "you've seen the most extreme, unsustained underperformance in about 50 years. There's clearly been a lot of fear, a lot of anxiety, but we're starting to see green shoots and more stability."

Harper believes that European equities are discounting a level of pessimism inconsistent with improving fundamentals. "We think there been a lot of Euro-skepticism," he says, "and overly discounted political-risk sentiment over the last six months or so."

The prospect of the proverbial black swan, he says, is the break-up of the Eurozone. "Counter that with the results of the U.S. election of President Trump. The subsequent sort of rally in the market was really a very optimistic view of political uncertainty."

Harper points to encouraging economic developments in Europe. GDP growth is picking up, as is the pace of consumer spending. "The economy is starting to recover," says Harper, "and you have this valuation opportunity. We believe selective valuation remains in still-depressed European financials and other cyclical shares."

For example, the French financial-services company BNP Paribas SA, which is among the top 10 holdings of Templeton Growth, has moved up and down in value since the 2008 financial crisis, and most recently in the run-up to the election of French President Emmanuel Macron on May 7. "The holding of BNP Paribas," says Harper, "shows quite well that we really try to look through short-term noise, looking for fundamental value over a five-year basis."

Harper says mid-2016, coinciding with the Brexit vote in the United Kingdom to leave the European Union, saw short-term losses in the shares of many financial-services companies. Subsequently, he adds, the markets became a bit more comfortable with the results of the Brexit vote and returned to thinking about the fundamentals of companies.

The Templeton team believes the health-care sector also offers opportunities in Europe. "We focus on companies where there's innovation, where there is a drug pipeline with relatively strong cash-flow generation where we think you can gain value. So we've got companies in the portfolio like Switzerland-based Roche Holding and Getinge AB, a Swedish-based company on the health-care supply side."

Asia, with a 21% weighting in the mandate, is about 10.5 percentage points above its weight in the MSCI World Index. It offers what Harper describes as selective value opportunities. "I steer away from Chinese banks, despite valuations," he says, "because we are concerned about the amount of debt in the Chinese system."

Instead, the Templeton team is finding "compelling bargains" across a number of sectors in China that are poised to benefit from growing innovation and affluence in the region. Those include technology, health care, insurance, industrials and telecommunications.

Other countries that look to be attractive hunting grounds for Templeton's bottom-up stock selection include South Korea and Japan. For example, Samsung Electronics Co. Ltd., which is among the top five holdings, has been held in the fund for more than a decade, with the stock weighting changing depending on valuations.

Despite political and macro worries that have been dogging some of the South Korean stocks because of its proximity to North Korea, Samsung remains attractive. "Samsung was an extremely strong performer last year," says Harper, "and we still think there's value to be released. The company is well positioned on a global basis with a below-average valuation."

In Japan, Templeton Growth's largest position is in SoftBank Group Corp. "The rationale there," says Harper, "was looking at a company that was known for its Japanese mobile-phone network." They also took a stake in  Sprint Corp. (S) in the U.S. and stakes in online start-up companies like  Alibaba Group Holding Ltd. (BABA). "So it was a holding-company play," says Harper, "where we felt the Internet assets were undervalued." It was also a cash-flow story where the company had strong cash coming out of the Japanese businesses.

In positioning the fund, "I like to say I'm sectorial and geographically agnostic," says Harper. "I don't really care where I find the best value, as long as we can find that value. I think that's how everyone should be thinking about investing."

Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
Alibaba Group Holding Ltd ADR201.89 USD0.94
Sprint Corp Registered Shs Series -1-5.53 USD2.22

About Author

Diana Cawfield

Diana Cawfield  Diana Cawfield is an award-winning writer who has been a regular Morningstar contributor since 2000. Her numerous publication credits include the Toronto StarAdvisor's Edge and Chatelaine, as well as the Canadian Securities Institute's online educational services.