The recent economic struggles that many European Union nations have experienced have caused many investors to flee from these markets. “Snake-Bit” (risk averse) investors who have taken huge losses are not comfortable with the currency risks or financial instability of countries like Greece, and they are not eager to stick around and wait for a rebound.
However, we believe opportunities abound. It is always important to focus on companies that are expected to improve their economic profitability and are trading at a discount to their intrinsic value. Although it may take patience for investors to discover opportunities in current markets, using AFG variables can make it easier to identify which opportunities are worth pursuing. Although there are some countries in the European Union that are still high-risk endeavors, there are also some very stable countries in the region.
Lately, ValueExpectations.com has focused on providing stock ideas that would add global exposure to client portfolios, by selecting the best companies within each index, rather than recommending the purchase of a generic ETF or Mutual Fund.
The companies listed below are from countries with more stable economies within the European Union, and have many of the characteristics that we look for when identifying stocks that are more likely to outperform. These companies are expected to improve their Economic Margins (what a company earns above or below its true cost of capital) in the next fiscal year and are currently trading at a discount to their intrinsic value. The backtest results shown below our list of companies will explain in detail the improved performance of portfolios when using these two criteria in concert within different countries and time periods.
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AFG has a consistent approach to a company’s true economic profitability not only across different sizes, styles, and sector universes, but also across different countries.
The charts below highlight the performance of AFG’s EM and valuation variables used to identify the most attractive European Stocks. Within each country, there is a considerable spread between the top and bottom halves for each variable (Percent to Target and EM Momentum), and an even more significant spread is achieved when you combine both variables. When looking for attractive global investment opportunities, investors can use these variables as a great starting point. (More on these charts below)
The first table highlights the quantitative performance of Percent to Target (Top Half vs. Bottom Half), EM Momentum (Positive Momentum vs. Negative Momentum), and the combination of both.
Note that in a worldwide strategy, a multi-variable quantitative approach (with Percent to Target and EM Momentum) along with international diversification (across all countries) creates a long strategy that outperforms 81% of the time and a short strategy that underperforms 84% of the time. (Calculated as market months)
The next table highlights the annual performance: (12/31/91 – 7/30/2010).
Note that the combined strategy adds a significant amount of alpha over the individual variable strategies, and only led to one year of underperformance in 1999.
The final table highlights quarterly performance to take this to a little deeper level: (12/31/01 – 7/30/2010).
Note that with variable diversification and international diversification, this strategy has only seen 2 quarters of underperformance since 2002 Q1.
We believe that the current macroeconomic uncertainty around the world may make most investment opportunities seem risky, but we believe that a portfolio built around stock selection adhering to these quantitative factors combined with international diversification should be well-positioned to outperform broader markets in the long run.