Beyond Bulls & Bears

Chua Spans the Eurozone and Beyond for Value

Alan Chua

Value, like beauty, is in the eye of the beholder.  One man’s splurge is another man’s thrift. So how do you define value? And where do you find it? Alan Chua, portfolio manager with the Templeton Global Equity Group and known value-hunter, has been spanning the globe to uncover it. You might be surprised to learn that the much-maligned eurozone, embroiled in an ongoing debt crisis, also happens to be a place he feels attractive valuations are ripe for the plucking. Top takeaways:

  • Chua sees “attractive opportunities” in the eurozone, based on valuations
  • Sectors to watch: pharmaceuticals and technology
  • Opportunities in Asia
  • Chua remains cautious on the U.S., as valuations there are not as cheap as Europe, but there are promising signs

Eurozone: Focus on the Opportunities

One thing the market dislikes is uncertainty. And we’ve certainly had a lot of that in the eurozone over the past year. Even the most well-known prognosticators can’t predict whether it will remain as it is today. Some countries could default on their sovereign debt. Some may leave the eurozone. While Chua recognizes these possibilities, he doesn’t feel it necessarily means investors should completely steer clear.

“My take on the eurozone crisis is that, rather than trying to forecast which country will leave the euro, we should focus on the valuations. And what the valuations are telling us is that the market seems to be already pricing in an event, that a number of countries could leave the euro. To us that looks like an opportunity because if there is any possibility at all that Europe gets its act together, none of these countries leave the euro, there’s still significant upside potential to the market based on those valuations. If you look at the valuations of banks in Europe, for example, they have recently been trading at levels which we have only seen reached three times in the last 100 years. So these valuations look like attractive opportunities to us.”

Any regular reader of these pages has probably noticed a theme of resolute focus on the long-term even in the face of daunting short-term market gyrations and spikes in uncertainty.  Says Chua, “I guess it’s always been part of our DNA that we like to buy when everybody else is selling and sell when everybody else is buying. And that’s something that Sir John Templeton himself said. And I think that has stood us in good stead over the years.”

Chua describes this as seeking to “arbitrage time horizons,” rather than “arbitrage information.” What does that mean? It means being a little more patient, and a little more long-term in one’s investment horizon. Chua notes, “We have no information advantage on large-cap, well-covered stocks, but our value add has been to look through short-term negatives to position ourselves for when the earnings cycle turns positive.”

Sectors to Watch: Pharmaceuticals and Technology

Alright–enough with the big picture philosophy.  Where is Chua casting his net?  Sectors on his global radar screen include pharmaceuticals, selected financials and technology, again based on long-term valuations. (Sensing a theme here?) Positive factors he notes for pharmaceuticals include potential for growth in emerging markets and new drugs in the pipeline that should offset older patent expirations.

Investors’ love affair with technology stocks soured after the dot-com bubble burst a decade ago. However, Chua felt it might be time to re-examine that formerly rocky relationship. He notes that the cash flow currently being generated by some technology companies is “massive,” and that there are appealing valuations in the sector.

Opportunities in Asia

The story may be changing in Japan, which suffered the wrath of natural disasters last year, and as a result, has not made the buy list for most investors. However, Chua is seeing signs that the auto supply chain is improving, and he has been picking up names in autos and auto parts. “Production is now scaling back to normal, moving back to pre-earthquake, pre-tsunami levels. And that is an opportunity for us because the market has marked down these companies severely.”

Chua is generally cautious on Japan, however, for a few reasons. The currency remains a drag on Japanese manufacturing. And, the earthquake and tsunami highlighted a fundamental weakness: non-diversification of supply chains. The longer-term issue Chua sees for Japan and the industrial base there is whether manufacturing remains at home, or moves increasingly offshore (as some Japanese auto companies have done already).

While Japan grapples with issues on the production side, China and India are growing on the consumption side. Growth and urbanization of the middle class in China and India means increased consumption of luxury goods. So are luxury goods companies a buy? Chua says there may be better long-term values in other sectors.

“I think it’s no secret that if you go to Hong Kong, the main buyers of luxury goods will be mainland Chinese tourists, and that has inflated valuations of luxury goods companies globally. But rather than focus on luxury goods, the other consumption item will likely be in autos. For example, Chinese consumption of autos or auto buying–and even in India, too–is likely to grow for decades to come. And that is potentially a long-term opportunity for some of the automakers.”

And What About the U.S.?

Chua believes the U.S. has “a lot of positives going for it.” He points out that the relatively weak dollar should favor U.S. manufacturing going forward, even more so if the U.S. can become more energy-independent, perhaps through an  increase in natural gas use. Nonetheless, the U.S. is not where he’s focusing. It all boils down to—you guessed it—valuations. “It’s just that European companies tend to be a lot cheaper.”

Until next time, here’s a little gem from the late Sir John Templeton on the subject of finding value:

“If you want to buy the same thing that is popular with your friends or popular with the investment security analysts, you can’t get a bargain. If you buy the same thing they buy you will get the same performance they get…Therefore, we search for those areas that are unpopular and then we study them to see if that unpopularity is permanent.”

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