Warren Buffett thinks there are some good bargains to be found among European companies. We should pay attention.
"You want to fish in a pond where the fish are and Europe is a much better pond." - Warren Buffett
Last month, I was in France on a wine-tasting tour. Warren Buffett was in Europe at the same time, but he wasn't there to drink wine. Rather, he was doing some bargain-hunting on behalf of his Berkshire Hathaway Corporation.
The company has some $35 billion available for investing and Buffett told a news conference in Frankfurt, Germany that the opportunities in Europe are much more attractive than those he's seen in North America or the emerging markets. "There's far more companies that would make sense for us to buy and for them to sell to us in Europe," he was quoted by Bloomberg News as saying.
Based on the performance of the key European markets so far this year, there should be plenty of bargains that would fit Buffett's value investing criteria. As of the market close on May 29, the Paris CAC-40 Index was down 11.4% so far in 2008, the German Dow was off 14.1%, Zurich's SMI Index had lost 11.1%, while Milan was down 13.9%. Those losses are more than double the declines experienced by the major U.S. indexes, where subprime chaos has created a train wreck among the financial stocks and the housing sector is going through its worst slump since the Second World War.
So Europe must be in even worse shape, right? Wrong! Granted, my vision may have been somewhat obscured by Champagne bubbles but everywhere we went conditions appeared to be prosperous and construction was booming. Those impressions were confirmed by first-quarter GDP numbers, which were released while I was there. The 15 eurozone countries - those that have adopted the euro as their official currency - showed a GDP growth rate of 0.7% during the first three months of 2008, up from 0.4% in the final quarter of 2007. However, that 0.7% figure is misleading, according to the European edition of The Wall Street Journal, because the eurozone uses a different method for calculating GDP. If the same methodology as used in the United States is applied, first-quarter growth came in at a very healthy 2.8%. In fact, the growth rate in Germany was the best since 1996.
So if everything is ticking along so well, why are the European stock markets diving? Blame it on the proverbial "wall of worry" - things may be fine right now but watch out! There's big trouble ahead! Some of the concerns include the following.
The rise of the euro. We all know how the increase in the value of the loonie against the American dollar has cut into Canadian corporate profits and made life miserable for exporters. Well, the same situation applies in Europe, only more so. Right now, our dollar is at about the same level against the greenback as it was on Jan. 1. By contrast, the euro has gained more than 7% against the U.S. dollar in only five months. This makes the price of European goods more expensive for U.S. buyers and there are fears the result will be a weakening in exports.
Oil prices. We think we've got it bad when it comes to filling the gas tank. In France, gas sells for around 1.50 a litre, which is about C$2.34. Europeans have always paid more for fuel but now they are starting to rebel. While I was in France, fishing boats staged a blockade of some of the ports on the English Channel and France's Mediterranean coast in protest against high diesel costs. In Britain, public anger is growing over a variety of fuel-related taxes that are pushing up the costs of cars and gasoline.
Inflation fears. As in North America, high oil prices are sparking inflation concerns which in turn are keeping European interest rates higher than those here and in the U.S. The European inflation rate actually declined slightly in April, to 3.3% annualized, thanks in part to the strong euro. But that is still well above the target set by the European Central Bank.
Unrest in France. The French are famous (or infamous, depending on your perspective) for street demonstrations and crippling strikes. While we were there, the national transportation system was partially shut down for a day and teachers walked out of schools in protests against attempts by President Nicolas Sarkozy to reduce public spending and raise the retirement age for public sector employees, some of whom can leave work with a full pension as young as 55. However, this round of protests seems to lack the passion of those of years past. It's now generally expected that Sarkozy will prevail and pull the French kicking and screaming into a new era.
Housing blues. There are tentative signs that the American housing slump may be replicated on the other side of the Atlantic, for many of the same reasons. The problem is especially acute in Britain where mortgage financing is increasingly tight, foreclosures are rising, and prices have come off their lofty peaks. It's too soon to say whether the problem will approach the magnitude of the U.S. housing depression (that's what it really is, after all). But concerns are rising and the incipient housing crisis is one of the reasons why British Prime Minister Gordon Brown is on the verge of being pushed out of office by an increasingly restless Labour Party.
So is this a good time to invest in Europe, or not? Clearly, Warren Buffett thinks it is, so the rest of us would be smart to pay attention. But invest in what? Most European mutual funds are in the red so far this year and among the few that are profitable not a single one has gained more than 1%.
At this point, I suggest a better approach is to invest selectively in individual stocks. We have several good European choices on our Internet Wealth Builder Recommended List at present, including Suez (which now trades over-the-counter under the symbol SZEZY), Diegeo PLC (NYSE: DEO), Telefonica SA (NYSE: TEF), and Veolia Environnement (NYSE: VE).
"You want to fish in a pond where the fish are and Europe is a much better pond." - Warren Buffett
Last month, I was in France on a wine-tasting tour. Warren Buffett was in Europe at the same time, but he wasn't there to drink wine. Rather, he was doing some bargain-hunting on behalf of his Berkshire Hathaway Corporation.
The company has some $35 billion available for investing and Buffett told a news conference in Frankfurt, Germany that the opportunities in Europe are much more attractive than those he's seen in North America or the emerging markets. "There's far more companies that would make sense for us to buy and for them to sell to us in Europe," he was quoted by Bloomberg News as saying.
Based on the performance of the key European markets so far this year, there should be plenty of bargains that would fit Buffett's value investing criteria. As of the market close on May 29, the Paris CAC-40 Index was down 11.4% so far in 2008, the German Dow was off 14.1%, Zurich's SMI Index had lost 11.1%, while Milan was down 13.9%. Those losses are more than double the declines experienced by the major U.S. indexes, where subprime chaos has created a train wreck among the financial stocks and the housing sector is going through its worst slump since the Second World War.
So Europe must be in even worse shape, right? Wrong! Granted, my vision may have been somewhat obscured by Champagne bubbles but everywhere we went conditions appeared to be prosperous and construction was booming. Those impressions were confirmed by first-quarter GDP numbers, which were released while I was there. The 15 eurozone countries - those that have adopted the euro as their official currency - showed a GDP growth rate of 0.7% during the first three months of 2008, up from 0.4% in the final quarter of 2007. However, that 0.7% figure is misleading, according to the European edition of The Wall Street Journal, because the eurozone uses a different method for calculating GDP. If the same methodology as used in the United States is applied, first-quarter growth came in at a very healthy 2.8%. In fact, the growth rate in Germany was the best since 1996.
So if everything is ticking along so well, why are the European stock markets diving? Blame it on the proverbial "wall of worry" - things may be fine right now but watch out! There's big trouble ahead! Some of the concerns include the following.
The rise of the euro. We all know how the increase in the value of the loonie against the American dollar has cut into Canadian corporate profits and made life miserable for exporters. Well, the same situation applies in Europe, only more so. Right now, our dollar is at about the same level against the greenback as it was on Jan. 1. By contrast, the euro has gained more than 7% against the U.S. dollar in only five months. This makes the price of European goods more expensive for U.S. buyers and there are fears the result will be a weakening in exports.
Oil prices. We think we've got it bad when it comes to filling the gas tank. In France, gas sells for around 1.50 a litre, which is about C$2.34. Europeans have always paid more for fuel but now they are starting to rebel. While I was in France, fishing boats staged a blockade of some of the ports on the English Channel and France's Mediterranean coast in protest against high diesel costs. In Britain, public anger is growing over a variety of fuel-related taxes that are pushing up the costs of cars and gasoline.
Inflation fears. As in North America, high oil prices are sparking inflation concerns which in turn are keeping European interest rates higher than those here and in the U.S. The European inflation rate actually declined slightly in April, to 3.3% annualized, thanks in part to the strong euro. But that is still well above the target set by the European Central Bank.
Unrest in France. The French are famous (or infamous, depending on your perspective) for street demonstrations and crippling strikes. While we were there, the national transportation system was partially shut down for a day and teachers walked out of schools in protests against attempts by President Nicolas Sarkozy to reduce public spending and raise the retirement age for public sector employees, some of whom can leave work with a full pension as young as 55. However, this round of protests seems to lack the passion of those of years past. It's now generally expected that Sarkozy will prevail and pull the French kicking and screaming into a new era.
Housing blues. There are tentative signs that the American housing slump may be replicated on the other side of the Atlantic, for many of the same reasons. The problem is especially acute in Britain where mortgage financing is increasingly tight, foreclosures are rising, and prices have come off their lofty peaks. It's too soon to say whether the problem will approach the magnitude of the U.S. housing depression (that's what it really is, after all). But concerns are rising and the incipient housing crisis is one of the reasons why British Prime Minister Gordon Brown is on the verge of being pushed out of office by an increasingly restless Labour Party.
So is this a good time to invest in Europe, or not? Clearly, Warren Buffett thinks it is, so the rest of us would be smart to pay attention. But invest in what? Most European mutual funds are in the red so far this year and among the few that are profitable not a single one has gained more than 1%.
At this point, I suggest a better approach is to invest selectively in individual stocks. We have several good European choices on our Internet Wealth Builder Recommended List at present, including Suez (which now trades over-the-counter under the symbol SZEZY), Diegeo PLC (NYSE: DEO), Telefonica SA (NYSE: TEF), and Veolia Environnement (NYSE: VE).
