Big European stocks a good bet, says investor

European stocks offer some of the world’s best investment opportunities even after outperforming other markets this year, in part because Greece’s festering crisis scared away buyers, said David Herro, one of the biggest US owners of shares in the region’s companies.

Greece’s struggle to obtain a new bailout, and its potential exit from the euro, highlight the structural flaws in the EU, said Mr Herro, chief investment officer for international stocks at Harris Associates in Chicago.

As a result, he’s loading up his $30bn (€26.8bn) Oakmark International Fund with shares of companies such as BMW and BNP Paribas at attractive prices.

“If you look at valuations around the world, you really still see the preponderance of value based in Europe,” Mr Herro said. “If you look at the last two to three years, clearly this Greek thing has been a great deal of the reason for this. People see the potential disintegration of the eurozone and they make a macro call and they want to just not be involved in the market.”

Many of Europe’s largest companies earn a big chunk of their profit in other parts of the world, so they will do fine even if the region’s economy struggles, he said. And he does expect it to struggle. The eurozone is a flawed project because countries such as Greece and Germany are too dissimilar to be in it together, Mr Herro said.

Also, government spending on social welfare in Europe is unsustainable, especially in countries that do not have growing populations, he said. While countries such as Ireland, Spain, and Italy have taken or are taking steps to fix these “structural deficiencies”, others, notably France, have not, he said.

“There will be a lack of investment, a lack of robustness, a lack of productivity growth, a lack of economic growth in Europe until they address these structural rigidities,” he said. “That’s not a reason to be invested or not invested in Europe, because they have some really good, strong global businesses with good management teams selling at attractive valuations for the medium- and long-term investor.”

European consumer-product companies also are suffering from the slowdown in China and other emerging markets, so their share prices have been depressed, said Mr Herro, who owns shares in Diageo, the maker of Guinness and Johnnie Walker whisky, and Financiere Richemont, the Swiss manufacturer of Cartier jewelry and Montblanc pens. That has allowed him to accumulate shares in anticipation of a rebound in those economies, he said.

While BMW shares slumped more than 20% from their peak in March on concerns about China, the company “is actually doing quite well around the world”, Mr Herro said. “Their recent sales numbers were quite strong even though China slowed down.”