By Matthew Lynn
LONDON (MarketWatch) — A currency that may implode at any moment. A collapsing banking system. A deepening recession, with no flexibility to boost growth through either monetary or fiscal policy. Making a bear case for euro-zone equities right now is easy.
But everything has a price. And some euro-zone markets are getting so cheap this summer that the moment to buy cannot be far away.
Such as? There are a lot of big, quality companies on both the Madrid and Milan bourses — the oil giant ENI (NYSE:E) , the electricity company Enel (MCI:IT:ENEL) or the clothing retailer Inditex (STN:ES:ITX) , which owns the hugely successful Zara chain. Pretty much regardless of what happens to their domestic economies, these companies will thrive and prosper. And, while they may get cheaper still, the truth is they are already good value — and there may not be as much downside left as the market thinks.
Fiat
The first phase of the euro crisis involved minor markets. Greece and Portugal have small stock markets and no very big companies.
Not surprisingly, as they hurtled towards full-scale bankruptcy, their stock markets tanked. Yet even if you decided they were a bargain, there wasn’t much to buy. Naming a Greek blue chip is even harder than thinking of a famous Belgian — there are a couple of the latter, but virtually none of the former.
Ireland was far more successful economy: It was one of the five richest countries in the world pre-crash. But its economy was mainly made up of foreign multinationals, property companies and banks. Apart from the budget airline Ryanair (NASDAQ:RYAAY) , it did not have many big companies.
The second phase is different. As the crisis moved into Spain and Italy, equity values crashed just as they had in the smaller countries. The Italian MIB (MCI:XX:FTSEMIB) is down to 13,000, compared with 40,000 back in 2007. It is now below its 1994 levels — almost two decades ago.
Revenue growth is sluggish for most of the market but not at these firms.
The Spanish market (STN:XX:IBEX) is under 7,000, compared with more than 15,000 before the crash. As Spanish bond yields have soared, and speculation has mounted that the country will need a bailout, the market has been down to levels last seen in 1999. A dozen years have been wiped out.
Unlike Greece and Portugal, these are major economies, and the markets include some global companies. The Milan index takes in the automobile manufacturer Fiat (MCI:IT:F) , the electricity company Enel and the oil giant ENI. These are big, solid companies with a lot of assets. It includes the sunglasses manufacturer Luxottica (NYSE:LUX) , which owns Ray-Ban, and the luxury-goods giant Salvatore Ferragamo (MCI:IT:SFER) , which sell its products globally. It is booming Asia that matters to them — not recession-hit Europe.
The Madrid index includes the retail chain Inditex, the owner of the Zara chain, among others, with more than 5,000 shops around the world, as well as the telecom giant Telefonica (NYSE:TEF) , with widespread interests in fast-growing South America, and the oil company Repsol (STN:ES:REP) .
Of course, it is not hard to understand why the markets in those countries have crashed. Their domestic economies are in deep recession. Spain, we learned this week, contracted by another 0.4% in the latest quarter. Italy is heading into another downturn. Borrowing costs have soared. Most of all, there is what the markets now politely refer to as “redenomination risk” — the possibility that your shares will be repriced from “worth-something euros” to “worth-almost-nothing new lira or pesetas.”
Yet everything, it bears repeating, has a price. And the fact remains that many of the companies on both indexes are very successful global business — and they will carry on being successful even if their domestic economy is in terrible shape.
A company doesn’t have to be based in a growing economy to do well. Japan has gone nowhere for two decades. But the likes of Uniqlo, the fashion retailer, have turned into major global companies. Britain is stuck in the longest recession since records began, but a company such as ARM Holdings, which designs the chips that power many smartphones as well as iPods and iPads, has still made huge progress.
Great companies can come from bailed-out countries. Ryanair is a case in point. The shares halved in value as Ireland went bust, but have performed reasonably well since then. If you bought in as Ireland sunk, you’d have done well. It hasn’t been destroyed by a deep recession in Ireland — and neither need many Spanish or Italian companies be ruined by a recession in their home economies. A company such as Telefonica has seen its profits hit by the recession — but it is not going to get wiped out.
True, the Spanish and Italian bourses might well get cheaper. If the euro does fall apart, there will be another crash in equity values. That said, to micro-time the market you have to be very smart or very lucky — and usually both. It will be hard to get in at the absolute bottom.
If Spain or Italy does quit the euro, trading on the main bourses will probably be suspended. Capital controls will be introduced. Banks may close their doors for several days. If you think that in a situation like that you can move in and snap up as many shares in Fiat or Inditex as you want, you may well be kidding yourself. This could be the cheapest moment when these shares are widely available to investors.
And the ECB may well step in at some point with unlimited quantitative easing. The euro zone could decide to pool its debts, and issue common euro bonds, which will immediately slash Italy’s and Spain’s debts. On either, the Italian and Spanish indexes would soar — particularly as both are heavy with hard-hit banks and insurers.
If you want to buy some very cheap equities that are good long-term values, these may be the markets to go for right now. Sure, there’s a catastrophe coming — but it is already in the price.
