European economy set to lag the U.S. in 2013

But even foreign-domiciled stocks can offer U.S. exposure, says Morningstar's Heather Brilliant.

Jeremy Glaser 21 January, 2013 | 8:00PM Heather Brilliant, CFA



Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. With predictions of very slow global growth in the coming years, should investors not look at foreign-domiciled stocks? I am here with Heather Brilliant--she's the global director of equity research at Morningstar--to answer this question. Heather, thanks for joining me today.

Heather Brilliant: Thanks for having me, Jeremy.

Glaser: So let's start a little bit with the macro outlook. Why do you think United States is going to continue to grow a little bit faster than, say, Europe?

Brilliant: Well, generally speaking, we think the U.S. economy is much better positioned to grow in 2013 and probably 2014 as well. Europe is really still recovering from the financial crisis, and a lot of the steps that Europe has had to go through have come a lot later than what we did in the U.S., in terms of restructuring, getting our banks in order, and getting balance sheets in order. So we're expecting that that's really going to be a drag on the European economy in the coming couple of years.

The U.S., though, really has dealt with a lot of those problems and we've already gone through some deleveraging, and so you're starting to see some stronger growth from consumer demand and even some companies really having pared back very quickly in terms of cutting costs. So we actually think the U.S. economy is pretty well positioned to do well this year.

Glaser: So does that mean U.S. investors should just not even look at European-domiciled stocks and just take those off those radars--take them off their radar--or are there opportunities there?

Brilliant: Well, actually, we took a look at the data of exposure to the U.S. and to North America in general, and we found that there are actually quite a lot of European companies that have 50% or more of their revenue coming from North America, almost as many as we found in the U.S., in fact, especially when we really just looked at the top 100 companies in the U.S. and in Europe in terms of market cap.

And when we did that, we found that if you buy companies in the consumer cyclical sector or the health-care sector, it actually doesn't matter if you pick a company that's domiciled in the U.S. or in Europe. You are generally going to get approximately 40% to 50% exposure to North America. Now remember, this is really talking about the largest companies in Europe and the U.S., so that's an important caveat.

Glaser: So, are there any cheap places to find U.S. consumer exposure then?

Brilliant: Well, generally speaking, it's pretty well priced in, so what we found is that the companies that have the highest exposure to the U.S. and North America, in general, are pretty fairly valued. Now of course we think market overall is fairly valued right now, but we would wait for a pullback before buying some of these names, because you really need a margin of safety, especially when you are talking about a sector like consumer cyclical.

Glaser: So what are some of the higher-quality names that maybe should be on people's radar in case of a pullback?

Brilliant: Well, in consumer cyclical, I'd mention a name like Starbucks; it's trading at a slight discount to what we think it's worth. But it gives you great exposure to the U.S. consumer, and if we saw the stock pull back, we think it's a very interesting one to hold. And on the European-domiciled side, I'd point to Covidien. Covidien is headquartered in Ireland, but a lot of its sales--a vast majority--come from North America. So we think that is an interesting opportunity and that one is actually trading at a 20% discount to what we think it's worth.

Glaser: Heather, thanks for sharing the data today.

Brilliant: Thanks for having me, Jeremy.

Glaser: For Morningstar, I'm Jeremy Glaser.

Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
Starbucks Corp86.32 USD2.21

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Jeremy Glaser

Jeremy Glaser  Jeremy Glaser is the Markets Editor for