The place to look for investment bargains, said the fund manager Sir John Templeton, is not where the news is good, but where it is really bad. Today that means looking for advantage amid the volatility and extreme valuations which the crisis in the embattled eurozone has brought in its wake. The strikes and riots that are spreading across southern Europe are exactly the kind of scary scenario in which investors with ice-cold blood in their veins, as one admirer once described Templeton, have historically been able to profit.
Since June, the broad European stock market index has risen by 11 per cent, reversing the losses of the previous three months. Yet the Athens market, which has lost four-fifths of its value since 2007, is up by almost 60 per cent from its low point this year as fears of imminent Greek exit from the euro have receded. Anyone brave enough to buy so-called ‘garlic bonds’, government debt issued by Spain, Portugal and Greece, would have seen handsome gains in the last few months, buoyed by the European Central Bank’s recently announced (but still to be implemented) plan to cap yields on these debt securities through open-market -purchases.
Inevitably, European bank shares have been among the most spectacular performers, in both directions. If the euro collapses, most European banks will be seen to be bust — as opposed to one step from insolvency, which they are now. If the currency can be held together, then the thin sliver of equity that stands between the most exposed banks and outright insolvency could multiply in value several times over. Anticipating this binary outcome, shares of banks such as BNP Paribas and Société Générale have risen, fallen, then risen again by about 60 per cent three times in the last 12 months; those of the National Bank of Greece have doubled, halved and doubled again.
But you don’t have to hold your feet quite so close to the fire to find more durable investment opportunities. Europe’s corporate sector is also throwing up potential bargains. Fears that the euro might implode have contaminated almost every part of the European stock market, with the result that valuations have fallen to levels which in relative terms (compared to UK or US stocks) have not been this cheap since the fall of the Berlin Wall more than 20 years ago. Good companies are being penalised almost as harshly as basket cases. It is a classic example of fear indiscriminately driving market prices, a necessary condition of exceptional share bargains.
Even companies whose business is mostly outside the Continent are trading at levels that would seem cheap were it not for the European stigma. Most professional fund managers know this, but prefer not to stray too far from the herd-like consensus. Of 100-plus open-ended funds with a Continental European mandate, more than 40 per cent have lost money over the past three years.
Yet there are notable exceptions. Jupiter European Opportunities investment trust, managed by Alex Darwell, has risen in value by more than 95 per cent over three years. His secret, a perfect example of the ice-veined Templeton approach, is to block out the ‘macro’ picture — the will-they-won’t-they euro dance — and concentrate on picking stocks that look cheap and full of growth potential regardless of the euro’s fate.
His best performers include a French company that issues prepaid employee vouchers, a German company that leases office equipment to small businesses and another whose digital payment service, a rival to Paypal, is making a splash in China. All three offer niche services and potentially world-beating competitive advantages; their businesses will be valuable whether the euro collapses, fragments or survives intact.
One notable absentee from the list of active investors in Europe this year is George Soros, the hedge-fund manager who famously led the charge that drove the pound out of Europe’s prototype currency arrangement in 1992. As an investor, he wrote earlier this year, he remains ‘very pessimistic’ about the future of the euro. His fire is directed particularly at German chancellor Angela Merkel, whose reluctance to commit her powerhouse economy to the huge and potentially open-dated cheque that now stands between Europe and the demise of its hapless currency is, in his view, an abdication of responsibility.
But his message is more nuanced than simply willing Mrs Merkel to guarantee the euro’s survival. He argues that Germany should either embrace its euro destiny with enthusiasm, or make its excuses and leave. There is, he says, no worse outcome than the current standoff in which Germany is edging towards picking up the bill, but with such evident lack of enthusiasm that it is serving only to fuel the north-south bitterness to which daily pictures from the battle zones of Madrid and Athens bear witness.
The latest plan to patch up the euro with the backing of the European Central Bank threatens to change the nature of the EU from a voluntary association of equal states into ‘an instrument of hegemony’, Soros says. He’s right. But the positive for investors is that the battle to save the euro is finally approaching its climax. Fragmentation could be bloody in the short term; survival quite possibly costlier in the longer term. But however it turns out, before long European share prices will be reverting to more ‘normal’ levels, with shares priced once again by analysis, not as now by emotion. For better or worse, tragedy is typically the investor’s friend.