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Europe Downgraded: Opportunties From High Yield French Blue Chips

January 18, 2012 | About:
Standard & Poor’s dropped a bomb on Europe on Monday, downgrading theEuropean Financial Stability Facility (EFSF). Also known as the “bailout fund,” the EFSF was put in place to make emergency loans to Europe’s troubled sovereign borrowers.

The downgrade, though newsworthy, came as little surprise. After Standard & Poor’s downgraded France and Austria late last week, it was all but inevitable. If the guarantors of the bailout fund are no longer rated AAA, it’s hard to see how the fund itself could be. Germany is now the only major European country to be rated AAA by all major bond ratings agencies, and given that the burden for saving the entire Eurozone now rests on Germany’s shoulders, it’s debatable whether even mighty Deutschland deserves such a rating.

For investors, what does all of this mean?

Frankly, not all that much. The markets were mildly roiled by the downgrade of France, but the downgrade of the EFSF barely made a ripple. To investors battle-scarred by a volatile year of sovereign debt crisis, a ratings downgrade isn’t as scary as it used to be.

It seems like an eternity ago, but it was just this past August when Standard & Poor’s downgraded the United States. It set off a firestorm of volatility, but once the dust settled investors realized that very little had changed. The sun still rose in the east the next morning, and the bond markets continued to function as if nothing had happened. Contrary to investment orthodoxy, yields actually fell after the U.S. downgrade.

In the case of Europe, the reaction was muted. France had a successful bond auction on Monday, and Europe’s leaders met the announcement with a collective shrug.

Freshman-226x300.jpgThis is not to say that all is well in the world. It’s more a case of resigned acceptance. As Matthew Broderick succinctly put it in The Freshman, “There’s a kind of freedom in being completely screwed because you know things can’t get any worse.”

This is more or less the market expectation for Europe today. The market has stopped reacting to bad news because more than enough bad news is already factored into prices. Ratings agencies have a well-deserved reputation for closing the barn door after the horse has already bolted. Standard & Poor’s told bond investors what they already knew—that debt-laden Europe is suffering from a crisis of confidence.

If you believe, as I do, that market confidence in Europe has reached its low point (or, at the very least, that it is close to doing so), then it makes sense to start accumulating shares of high-quality European blue-chip multinationals. I’ve been wildly bullish on the prospects for German stocks in recent months (see “Buy Germany While It’s Down“) but France has its share of attractive companies as well. Investors may want to consider picking up shares of French oil major Total S.A. (TOT) on any weakness. Total trades for just 7 times earnings and yields and impressive 5 percent in dividends.

Investors seeking yield may be particularly interested in French telecom giant France Telecom S.A. (FTE). France Telecom trades for 10 times earnings and yields over 9 percent in dividends. In addition to its dominant position in France, France Telecom also has great exposure to Africa and other fast-growing emerging markets.

If you prefer a one-stop-shop for French stocks, the iShares MSCI France ETF (EWQ) would be a good bet. In addition to Total and France Telecom, EWQ counts luxury powerhouse Moet Hennessey Louis Vuitton and pharmaceutical giant Sanofi among its largest holdings.

About the author:

Charles Sizemore
Charles Lewis Sizemore, CFA is the Chief Investment Officer of Sizemore Capital Management. Please contact our offices today for a portfolio consultation.

Mr. Sizemore has been a repeat guest on Fox Business News, has been quoted in Barron’s Magazine and the Wall Street Journal, and has been published in many respected financial websites, including MarketWatch, TheStreet.com, InvestorPlace, MSN Money, Seeking Alpha, Stocks, Futures, and Options Magazine and The Daily Reckoning.

Visit Charles Sizemore's Website


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