Let’s face it. These days there is a media obsession with Europe, and most of the news has been less than great. OppenheimerFunds holds shares of many European-based companies. However, we are not overly concerned about our European holdings despite the negative headlines. There are a few key reasons for this.
First, we don’t believe geography is a useful lens through which to view investing. Rather our investment principles are guided by structural growth themes we refer to as our MANTRA (Mass Affluence, New Technology, Restructuring and Aging), which are transnational concepts. For example, the idea that internet/wireless data traffic will grow by 100% a year for up to a decade doesn’t stop at a border, nor is the projected deluge of data that underpins this forecast related to any one region or country.
Second, good returns are usually born of low, not high prices, and prices in Europe reflect low expectations. The Bloomberg European Index, a cap-weighted index of the 500 largest stocks in Europe, now trades at less than 11-times this year’s earnings expectations and yields just under 4%. By comparison, stocks based in the U.S., which has a sounder economic footing than Europe, carry higher expectations trading at a P.E. of more than 13-times this year’s expected earnings and yielding just over 2%.
Third, when selecting businesses to invest in, we are keenly interested in who and where the customers are, not so much about where the headquarters are located. This is a critical notion to grasp, as many superior businesses headquartered in Europe are not really about Europe at all. For example, Unilever is an Anglo-Dutch consumer products conglomerate with important footprints in a number of the most dynamic emerging countries born of a colonial heritage. As such, the company’s future will largely be determined by consumers in these emerging markets, as opposed to only those in Europe or other developed economies.
Two French companies, Alstom and Vallourec, also serve as good examples. While their stocks have been beaten up—due, in part, to their French domicile—the outlook for both companies will probably depend more on the predicted boom in natural gas production in the United States from “fracking,” a new technique for extracting natural gas from shale rock. Alstom is a global leader in the construction of gas-fired power plants, while Vallourec manufactures high-precision steel tubing used in the oil and gas business. We believe both have bright long-term prospects that have little to do with what happens in France.
If Oppenheimer International Growth Fund were a conglomerate, its overall revenue exposure to Europe would be only 36%, despite having 74% of its companies headquartered in there. The bottom line is most of the things we own in Europe are not about Europe.
Foreign investments may be volatile and involve additional expenses and special risks including currency fluctuations, foreign taxes and political and economic uncertainties. Emerging and developing market investments may be especially volatile. Investments in securities of growth companies may be especially volatile. Small- and mid-sized company stock is typically more volatile than that of larger, more established businesses, as these stocks tend to be more sensitive to changes in earnings expectations and tend to have lower trading volumes than large-cap securities, creating potential for more erratic price movements. It may take a substantial period of time to realize a gain on an investment in a small- or mid-sized company, if any gain is realized at all. Diversification does not guarantee profit or protect against loss.