Want investment value? Europe's the last bastion

Our bottom-up approach to stock selection is telling us that Europe is the most promising investment market in the world.

At Forager, we don't base our investments on macroeconomic forecasts, interest rates, unemployment rates or themes. We simply try and find cheap stocks, and put them together in a portfolio that sensibly mitigates risk.

Sometimes, however, this bottom-up approach tells you something significant about the wider investment landscape.

Right now, the bottom up approach is telling us that Europe is the most promising investment market in the world.

European sharemarkets are relatively cheap. Whereas the S&P 500 trades at 18 times forward earnings, the MSCI Europe index trades on 14 times. Our Forager international fund is roughly half invested in Britain and Europe, a region that represents about 20 per cent of the MSCI world index.

That is a function of us finding far more investment ideas in Europe over the past 12 months. And it is still true today – perhaps three in four new ideas presented by the team are from the region.

And the companies we own are telling us that the economic backdrop is nowhere as bad as most investors think.

Long-awaited progress

The Forager international fund owns shares in Flughafen Wien, Vienna's international airport, which is listed on the Austrian stock exchange. Since October, growth in the number of passengers travelling through the airport has been more than 5 per cent, more than double previous growth rates. Our analysis suggests this is a trend reflected across Europe, with those airports that aren't capacity constrained reporting healthy traffic growth. Airport passenger numbers and economic growth are highly correlated.

Another stock we follow closely but (unfortunately) haven't invested in is Italian mortgage broker Mutui Online. The company recently unveiled its 2016 results and was bullish about the Italian mortgage market. Loans for Italian home purchases grew 20 per cent last year and the strength has continued into 2017.

In a market that had been in decline for the past decade, that is a long-awaited sign of strength.

From cement makers to hardware stores and banks, recent commentary from the management of our European investments has been surprisingly and consistently positive.

That is inconsistent with widespread investor antipathy towards the region (I recently heard a fellow institutional investor describe Europe as "uninvestable"), which is why the shares are still cheap. But if the region can clear a few political hurdles this year, that could all change in a hurry.

Pivotal elections

Three big European elections this year hold the keys to the region's future. The Dutch, French and Germans all go to the polls in 2017 and, on the back of British voting for Brexit and Americans electing Donald Trump leader of the US, many pundits and investors fear more protest votes and, ultimately, the unravelling of the entire European Union.

This risk is not to be dismissed. We contemplate it with every stock we look at and construct our portfolio in a way that makes it as robust as possible to these events transpiring.

At least in the short term, though, it is a risk that is being overemphasised. The Dutch have already voted against nationalist candidate Geert Wilders. The Germans are highly unlikely to boot Angela Merkel. And, while a Marine Le Pen victory in France is still the biggest risk, it is looking increasingly unlikely.

Once more, the risk of upheaval is not to be dismissed. But in a world of low interest rates and high asset prices, Europe is the last remaining bastion of value. With a cheap currency, early signs of economic improvement and one potentially problematic election behind it, it should start getting a lot more attention.

Forager's top holdings in the region include British annuities provider JRP Group, Italian bank UBI Banca and Scandinavian cement company Cementir, which is also listed in Italy. For those with less of a penchant for direct stock picking, low cost index funds specific to the region are widely available. The market should provide adequate returns from here and, if economic data starts to reinforce our anecdotal evidence, investors should get some currency appreciation to boot.


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Steve Johnson
Founder & Chief Investment Officer

Steve began Forager Funds in 2009, and now manages approximately $350m across two funds. Offering a listed Australian Shares Fund (FOR) and an unlisted International Shares Fund, Steve focuses on long-term investing in undervalued companies.

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