Barron's : European Stocks Look Attractive

European Stocks Look Attractive
Ryanair, Berkeley Group Holdings, NN Group, and Vodafone are available at

January’s market downturn offers an opportunity to shop for European bargains in February.


The indiscriminate nature of the selloff, fueled by worries about China’s slowing economy, lower oil prices, and heightened volatility, means that the pain has been meted out broadly and unevenly. As a result, some quality European stocks now are available at attractive prices. In spite of the rout—European stocks retreated 6.4% in the first month of 2016—investment professionals are sticking to their guns: In general, their preferred plays are exposure to domestic economies that are rebounding and to the European consumer.
“Thematically, we have not changed our view,” says Jonathan Ingram, who manages the JPMorgan Intrepid European Fund (ticker: VEUAX), which has $1 billion in assets. He has added to his holdings in airlines Ryanair Holdings (RY4C.Ireland) and easyJet (EZJ.UK), which generate nearly all of their sales in Europe, and global carrier Air France-KLM (AF.France).
Shares of fast-growing budget carrier Ryanair, Europe’s biggest airline, fell about 9% in January. They closed Friday at 13.69 euros ($14.82), down from €15.01 at the end of 2015, and look cheap at less than 13 times estimated earnings for 2017. Ryanair is forecast to increase earnings per share at about 15% annually for the next two years.
EasyJet looks like an even better value at about nine times next year’s projected earnings. The low-cost carrier’s shares have fallen 11% from last month’s high, closing Friday at £15.48 ($21.94). Terrorist attacks in Paris and Egypt have crimped its revenues and the benefits of lower fuel prices could be eroded by exchange rates. But it is forecast to boost earnings per share at a double-digit pace for at least the next couple of years. On top of that, it offers a dividend yield of 3.5%, which can cushion bumps.
Air France-KLM seems to have clearer skies ahead after a period of turbulence. The company should turn a profit this year after several years of losses. Ingram views it as “a relative winner” because it could benefit sooner than some rivals from lower oil costs as it has limited hedging on future fuel needs. At Friday’s close of €7.39, Air France-KLM’s shares trade at less than six times forecast 2016 earnings, an indication of investors’ caution. The stock has defied the January swoon, and it is ahead 5.3% since Dec. 31 and 15% in the past three months, but investors might want to wait for more evidence that the worst is over before boarding.


Ingram has raised holdings of United Kingdom house builders such as Barratt Developments (BDEV.UK), Persimmon (PSN.UK), and Berkeley Group Holdings (BKG.UK), due to the imbalance between demand and supply. The stocks held up well last month, losing just a few percent. Berkeley looks particularly attractive. Its shares, trading Friday at £35.35, are priced at just nine times projected earnings for fiscal 2017 and offer a dividend yield above 5%.
Katrina Dudley, who runs the Franklin Mutual European A Fund (TEMIX), likes insurers and telecoms. Her top 10 holdings include “a fair amount of domestic exposure” with insurers NN Group (NN.Netherlands) and Direct Line Insurance Group (DLG.UK), and telecoms Vodafone Group (VOD.UK), Royal KPN (KPN.Netherlands), and Deutsche Telekom (DTE.Germany). She remains upbeat on Europe’s prospects compared with other regions. “The good thing for Europe is that Europe looks like the best house on a bad street,” she says.

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Closing Market Summary: Stocks End Down Month on Higher Note

The major indices ended the last trading session of a miserable January on a sharply higher note. Today's rally followed the Bank of Japan's vote to adopt a negative interest rate policy while oil added to its recent advance. The Dow Jones Industrial Average (+2.5%) paced the S&P 500 (+2.5%) while the Nasdaq (+2.4%) followed.

Despite today's rally, the S&P 500 tumbled 5.1% in January while the Nasdaq surrendered 7.9% as global growth concerns returned into focus. On that note, market participants are scheduled to receive key manufacturing data out of China and the U.S. on Monday, which may influence how the market starts February.

Overnight, the Bank of Japan narrowly voted to approve a negative interest rate on some excess reserves. At its core, the new policy is meant to discourage parking deposits at the central bank in order to have the capital take a more active role in propping up and expanding the country's economy. The policy change struck a cautious note, as the move might signal an exhaustion of quantities easing measurers, but nevertheless global indices rallied on the news of continued easing.

Oil was able to benefit from the positive market conditions as the commodity rallied above the $33.00/bbl level overnight. Ongoing speculation regarding supply cut cooperation between OPEC and non-OPEC states helped drive the commodity to the $35.00/bbl price level. The energy component surrendered this price level after reports indicated that Iran would not join a coordinated production cut with OPEC. Despite this news, WTI managed to maintain part of its advance, ending its pit session with a 1.5% gain at $33.73/bbl.

Technology (+3.6%) outperformed the other sectors as materials (+2.9%) and industrials (+2.8%) followed while consumer discretionary (+1.2%) and health care (+1.8%) underperformed.

In the heavily-weighted technology space, Microsoft (MSFT 55.09, +3.04) shot up 5.8% after the company reported a beat in their fourth quarter earnings report. The large-cap helped lift the larger sector to the top of the leaderboard and built on yesterday's interest in tech names. Facebook (FB 112.21, +3.10) was able to continue its advance following yesterday's earnings beat while Apple (AAPL 97.34, +3.25) recovered from its miss. Elsewhere, high-beta chipmakers showed relative strength, evidenced by the 4.6% gain in the PHLX Semiconductor Index.

Dow component Chevron (CVX 86.47, +0.55) added 0.6% on the heels of an earnings miss while fellow energy giant Exxon Mobil (XOM 77.85, +0.86) underperformed ahead of its earnings report on Tuesday. Meanwhile in the larger energy sector, Phillips 66 (PSX 80.15, +1.45) was able to climb 1.8% after spending most of its day beneath its flat line despite beating earnings estimates.

The health care space (+1.8%) was the only countercyclical sector to end the week in negative territory. Biotechnology showed relative weakness all week, evidenced by the iShares Nasdaq Biotechnology ETF's (IBB 264.11, +0.64) 7.3% slide since last Friday.

Heavyweight Amazon (AMZN 587.00, -48.35) kept the consumer discretionary space behind the broader market, as the stock plummeted 7.6% after missing analyst expectations regarding operating income and EPS. Elsewhere in the space, fellow F.A.N.G. member, Netflix (NFLX 91.84, -2.57) showed continued weakness, falling 2.7%.

Treasuries traded near their highs the entire session, suggesting investors may have taken advantage of international rate differentials. The yield on the benchmark note ended the day lower by five basis points at 1.93%.

Today's trading volume kept with recent trends and was relatively heavy with more than 1.6 billion shares changing hands at the NYSE floor.

Today's economic data included the advance reading of Q4 GDP, the Q4 Employment Cost Index, Chicago PMI for January, and the final reading of the January Michigan Sentiment Index.

  • The advance fourth quarter GDP report was quite weak as expected, showing an annualized rate of real GDP growth of just 0.7% (consensus 0.9%) and down from 2.0% in the third quarter.
    • The report showed weak quarter-over-quarter readings for all key components.
    • Personal consumption expenditures increased 2.2% versus 3.0% in Q3, gross private domestic investment declined 2.5% after a 0.7% declined in Q3, exports fell 2.5% after increasing 0.7% in Q3, imports rose 1.1% after increasing 2.3% in Q3. Final sales of domestic product, which exclude the change in inventories, were up just 1.2% after increasing 2.7% in the third quarter. That was the weakest pace since a 0.2% decline in the first quarter of 2015.
  • The Employment Cost indexrpse 0.6% (consensus 0.6%)
  • The GDP Deflator was up 0.8% (consensus +0.9%) after a 1.3% increase in the third quarter.
  • The Chicago Purchasing Managers Index produced some good news, surging 12.7 points to 55.6 from 42.9 in December. (consensus 45.0) and the highest reading in a year.
    • The move in January was powered by big upticks in its two largest components: new orders (from 38.6 to 58.8) and production (from 46.7 to 62.5).
  • The final reading for the University of Michigan Consumer Sentiment Survey for January dipped to 92.0 from the preliminary reading of 93.3. The final reading was below the (consensus 93.2)
    • The January reading marked a downturn from the final reading of 92.6 for December. It was said the stock market declines and weakened prospects for the national economy factored into the dip in consumer sentiment. There was no evidence that the East Coast blizzard influenced the final reading for January. One item highlighted in the review of the survey was that favorable financial prospects have become dependent on very low inflation.

China's Official Manufacturing PMI and Caixin Manufacturing PMI are scheduled to be released on Sunday at 20:00 ET and 20:45 ET, respectively.

Monday's domestic economic data will include the 8:30 ET release of PCE Prices for December (consensus 0.2%) while Construction Spending for December (consensus 0.5%), and the January ISM Index (consensus 48.3) will cross the wires at 10:00 ET.

  • Russell 2000 -8.6% YTD
  • Nasdaq -7.9% YTD
  • Dow Jones -5.5% YTD
  • S&P 500 -5.1% YTD

>>> Weekly Update

Weekly Market Update: Fed Cautious, Japan Less Than Zero


Steadying crude prices and another bout of central bank cajoling helped global equity markets stabilize this week. The Bank of Japan surprised markets by putting interest rates into negative territory for the first time ever, joining the ECB and various other European central banks. Voting 5-4 in favor of the measure, the BOJ announced that it will charge a rate of -0.1% for excess reserves parked at the bank by financial institutions, and implied that lower oil prices made its decision necessary. At the scheduled meeting on Wednesday, the US Federal Reserve left the door open to a March rate increase despite acknowledging that "economic growth slowed" since its last meeting in December. Meanwhile, the PBoC pumped cash into the Chinese economy and continued its streak of very gradually strengthening the yuan exchange rate. Stocks continued to be to be very volatile, and by Friday the DJIA posted its eighth straight day with a triple digit move. For the week, the DJIA gained 2.3%, the S&P rose 1.7%, and the Nasdaq added 0.5%.

Global interest rates dipped on the news the BOJ was going negative. The 2-year US Treasury yield dropped to a 3-month low while German short rates forged further into negative territory. Fed fund futures found buyers after the FOMC statement on Wednesday and remained bid through Friday, with many acknowledging it will be even harder for the Fed to gradually take rates higher if major Central Banks around the world keep their foot on the stimulus pedal. The Dollar rallied 2% against the Yen and 1% against both the Euro and Pound on Friday further complicating factors.

The FOMC offered more cautious language in its statement, warning that economic growth slowed late last year, after previously describing the expansion of economic activity as moderate. Further, the statement abandoned its balanced outlook language ("the committee sees the risks to the outlook for both economic activity and the labor market as balanced") and said inflation would "remain low in the near term." On the positive side, the Fed noted further improvement in labor market conditions. Analysts said the changes reflected a more cautious outlook, but hardly ruled out more rate hikes. Friday afternoon Dallas Fed President Kaplan clarified that the message from FOMC statement was that more time is needed to assess global situation. He said the committee has good reason to be patient on rate decisions, and that the number of rate hikes this year is not locked in.

Heading into Friday's BoJ decision, expectations had been piling up for Kuroda and company to respond to softer economic data. The final straw were the lower inflation rates seen in the Japan and Tokyo January CPI prints - particularly in the forward-looking capital region - along with bigger than expected declines in household spending and industrial output. Echoing Mario Draghi's famous phrase, BoJ Chief Kuroda said the bank was prepared to do "whatever it takes" to achieve its 2% inflation target, and that the bank would go even deeper into negative territory if needed. In addition, the BoJ cut its FY16/17 CPI projection to 0.8% from 1.4% prior but maintained its FY17/18 forecast at 1.8%, noting that the assumptions were based on oil prices rising to over $40/bbl by 2018.

The PBoC used liquidity injections ahead of the lunar New Year holiday to add the most funds to the Chinese financial system in three years to help stem the seasonal cash crunch. The bank auctioned a total of 590 yuan or nearly $90 billion in reverse repos in two auctions. The PBoC has signaled its preferences for such lending and liquidity operations in place of RRR cuts, although officials also said this week that RRR cuts can still be used, if needed. Meanwhile, as of Friday the PBoC has strengthened the yuan midpoint for 15 consecutive sessions. Analysts suggested that the BoJ move would put heavy pressure on the Chinese to resume devaluation of the yuan.

Russia and OPEC began the painful process of admitting that oil prices have sank too far and that something must be done to put a floor under the market. There were reports from mid-week that OPEC was considering a meeting with major non-OPEC producers to discuss the market and possibly attempt to get all parties to agree to equal, coordinated production cuts. One report suggested the Saudis wanted everybody to cut 5% of production. OPEC officials downplayed the reports, but did say the door was open to cooperation. Iran could dampen the chances of a broad producer agreement, as Tehran appears focused on restoring its oil industry to pre-sanction production levels. The reports helped WTI test above $34 on Thursday and Friday, while Brent managed to test above $35/bbl.

Another January regional manufacturing report surprised to the upside, offering a glimmer of hope for the battered US manufacturing sector. Earlier in month, the New York Fed's January Empire survey hit its lowest level since the depths of the recession in early 2009, while the Philly Fed manufacturing index improved significantly on a m/m basis, but remained in negative territory. On Friday, the Chicago PMI saw its biggest m/m rebound in decades, rising back into expansion territory at 55.6 from a six-year low of 42.9 in December. The new orders component of the barometer jumped to the highest level in a year, while production also surged. The December durables report was much less positive, with the headline figure down 5.1% - the biggest monthly drop since mid-2014 - following a 0.5% decline in November. Orders for nondefense capital goods (ex-aircraft) - a key proxy for business investment - plummeted 4.3%. Analysts suggest that the headline loss was mostly due to big declines in the very volatile aircraft orders category, while the nondefense capital goods slip was largely concentrated in the oil and gas sector.

Among the most notable stories out of earnings season was the extreme volatility hitting elite tech stocks. Shares of Amazon rose 9% ahead of its report on Thursday afternoon, then plunged 13% after market as profits widely missed expectations (nearly every other metric telegraphed excellent and sustained growth in Amazon's various businesses). There was no run up ahead of Apple's results, as most observers expected the company to offer disappointing iPhone sales, although the reaction to modest miss (74.8M v 76Me) was compounded by the firm's typically conservative forward revenue guidance. Shares of Apple were down around 8.3% on the week by Thursday afternoon. On the positive side, Facebook gained 15% to a new all-time high on big double-digit gains in daily and monthly active users, and a 57% y/y gain in ad revenue. Microsoft was up 5% on modest outperformance in its second quarter, even as net income and revenue slipped lower y/y.

Johnson Controls agreed to combine with Tyco, in a deal that appears to be chiefly engineered as a tax inversion to move JCI to Ireland and lower its corporate tax rate. Shareholders of Johnson Controls will own about 56% of the combined company and Tyco holders will own 44%. After a tangled, months-long, three-way merger drama, Nexstar has secured a deal to acquire Media General for more than $2.1 billion. Meredith Corporation bowed out from its own attempt to combine with Media General, in exchange for a $60 million breakup fee and a first look at some of the divestitures that may be required to get Nexstar's Media General deal done. Media General agreed to be acquired for $10.55 a share in cash and 0.1249 of a share of Nexstar common stock.

REuters : Terex sale talks with Zoomlion continue despite worry U.S. may block:

Terex sale talks with Zoomlion continue despite worry U.S. may block: sources

Terex Corp's sale discussions with China's Zoomlion are continuing despite concerns a deal could be blocked by the Committee on Foreign Investment in the United States (CFIUS), according to people familiar with the matter.

CFIUS, set up by the U.S. government to scrutinize deals that could pose national security threats, has been increasingly flexing its muscle amid intensifying Chinese interest in foreign investments. Earlier this month, it forced Philips to scrap a $3.3. billion sale of its lighting business to a consortium backed by Chinese investors.

Terex, a Westport, Connecticut-based crane maker, has 97 so-called priority-rated contracts with the U.S. government that could attract CFIUS scrutiny. It also provides mobile harbor cranes in ports that are seen as a critical part of U.S. infrastructure.

"Dubai Ports (World) pales in comparison to the potential security issues involved" with a potential Zoomlion merger with Terex, Michael Wessel, a member of the US-China Economic and Security Review Commission, tweeted on Wednesday.

Dubai's DP World dropped a deal to manage six U.S. ports in 2006 following U.S. political backlash.

While Terex's board has yet to decide on whether it should abandon an agreed sale to Finland's Konecranes in favor of Zoomlion's $3.3 billion unsolicited proposal, it is not treating CFIUS as an issue that would preclude any deal with Zoomlion, the people said this week.

The value of Terex's priority-rated government contracts is very small and not material to Terex's business, according to the sources.

The company's ports business in North America is also small, with its biggest contract being a $75 million order for automated equipment at the Long Beach port in California, the sources added.

The sources asked not to be identified because the deliberations are not public. Terex declined to comment, while a Zoomlion spokesperson was not immediately available for comment.

Port equipment accounted for 11 percent of Terex's sales in 2014, according to its latest annual report.

To be sure, Terex already has a Chinese competitor operating in U.S. ports, Zhenua Port Machinery (ZPMC).

Zoomlion has offered $30 per share in cash for Terex, versus the 0.8 Konecranes shares for each Terex share that its shareholders stand to receive as a result of the deal that was agreed in August. Terex shares ended trading in New York on Thursday at $22.

Terex has to pay Konecranes a $37 million termination fee under its merger agreement if its board changes its recommendation on the deal.

A deal for Terex would stretch Zoomlion's balance sheet and may spur it to seek backing from the Chinese government, William Blair equity analysts wrote in a research note on Jan. 26. This could increase CFIUS scrutiny of the deal. Zoomlion is partly owned by the Chinese province of Hunan.

On Wednesday, Konecranes Chairman Stig Gustavson questioned how Zoomlion would finance a transaction and whether it could get a deal with Terex approved by U.S. authorities.