Is It Time to Go Bargain Hunting in Europe?
Andrés is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
European and world markets rallied strongly on Thursday after hearing comments from the European Central Bank President, Mario Draghi about doing “whatever it takes” to save Euro. Let's look at why this could be a game changer in the Eurozone crisis, and 5 stocks to benefit from such scenario.
“To the extent that the size of the these sovereign premia hamper the functioning of the monetary policy transmission channel, they come within our mandate…Within our mandate, the ECB is ready to do whatever it takes to preserve the euro…and believe me, it will be enough”. Said Mr. Draghi during a conference in the UK on Thursday morning.
There were not many precisions, but the message still sounds clear, the European Central Bank is willing to get its hands dirty and get more actively involved in the European crisis. This could be just another one of those pompous statements by European leaders without much action behind it, but it does sound like an important step in the right direction to stop a spiraling debt crisis.
The following facts may surprise you: as of 2011 Spain had a debt to GDP ratio of 68.5%, and a fiscal deficit of around 8.9% of GDP. The United States had a debt to GDP of 102.8% and a fiscal deficit of 9.6%. Japan has eye-popping debt level of almost 230% of GDP and a fiscal deficit of more than 10% of GDP. However, Spain is grabbing all the attention when it comes to debt crisis talks.
There are many important differences between these three countries, but in terms of the urgency of their debt problems, their monetary systems make a world of difference between Eurozone countries and Japan or the US.
When someone buys Japanese debt, they are purchasing a Yen denominated asset, and Japan has access to the Yen printing press. Japan still needs to be careful, of course, because the country’s currency could lose value and that would have inflationary consequences if they print too much money. When investors buy a Japanese bond, they know they are getting their money back in Yens; the value of the Yen versus other currencies is a different, not so urgent, issue.
On the other hand, Greece, Spain, Italy and the likes, don´t have the possibility to print Euros in order to cancel their debts or save their financial system. There have been so many conflicts and discussions among leaders of different countries in the region that investors have good reasons to feel nervous about the possibility of a credit event of unimaginable consequences.
That´s why having an active central bank ready to intervene if necessary is so important in this kind of situations. It won´t solve the structural problems in any of these countries, of course, but it can at least bring some tranquility on the basis that there is someone with enough fire power to avoid a financial collapse in the short term.
A low risk vehicle to play a stabilizing European situation could be Unilever (NYSE: UL), the third largest packaged food company in the world sells everyday necessities all over the planet, with more than 50% of sales coming from emerging markets. The business is financially solid and operationally diversified, and shares of Unilever carry a 3.8% dividend yield.
Global pharmaceutical Sanofi (NYSE: SNY) is facing various patent expirations over the coming years, but it also has a deep pipeline of late-stage products that could provide more than enough revenue to compensate for those lost patents. The acquisition of Genzyme last year should also provide extra material to launch new products into the markets, and Sanofi pays a juicy 4.6% dividend yield.
If things are going to be more stable in Europe, that would benefit not only stocks in that region, but also global risky assets including energy prices. That’s a double win for Total (NYSE: TOT), the integrated energy giant based in France.
The company has operating margins above 14% and has been investing heavily in deepwater, LNG, and oil sands areas, which provide the basis for abundant growth opportunities in the middle and long term. Shares of total are also attractively valued, paying a 5.8% dividend yield.
Siemens (NYSE: SI) is a multinational electrical engineering company based in Germany which stands to benefit from better economic times in the Eurozone and higher infrastructure spending in emerging markets. The company has a leadership position in the global wind turbine industry, which has an interesting long term potential. Siemens rewards investors with a 3.5% dividend yield.
If you are willing to go all in on the thesis of a more stable European financial system, Banco Santander (NYSE: SAN) has enormous upside potential under such scenario. This Spanish bank gets nearly 50% of its earnings from Latin America, where it achieves higher profitability and better growth that in Europe. Banco Santander has an enormous dividend yield of more than 12%, if things get better in Europe, this could be a high paying bet.
But the risks are considerable too, the bank still has a complicated portfolio of nonperforming loans, and it’s really hard to tell the true value of those assets. Also, there is always the risk of more bank runs or financial system restructuring in the region, and investors in Santander could be exposed to big and permanent losses in such scenario.
The European crisis is not under control yet, far from that. But the recent comments from the ECB president are pointing in the right direction, and you have to start somewhere. Considering the abundant investment opportunities in the depressed Euro region, maybe it’s time to start shopping for bargains in the old continent.
acardenal has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Total SA. (ADR) and Unilever. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.