Q&A: European financial companies may be this year's surprise
Marc Halperin, senior portfolio manager of Federated International Leaders Fund, discusses the global environment for investing with an eye toward European financial companies and building materials.
Q: What’s your outlook for international markets in 2013? We are very positive for international stocks in 2013. The global macro environment, barring some external shock, may surprise people with its continuing strength. The Chinese economy is reaccelerating on the back of another large fiscal stimulus program, inflation there is low and the economy will see economic growth of about seven to eight percent. China’s renewed economic momentum will certainly be a boon for Southeast Asia’s trading-led economies. Countries like Hong Kong, Singapore, Malaysia, Thailand, Indonesia and the Philippines have shown remarkable growth and resiliency the past several years. Finally, while Europe remains in recession, we think the worst may be in the past.
Q: What sectors are you finding value internationally? While a bit counterintuitive, financial companies in Europe are at historically low valuations. Many companies are trading below book value and at single digit price-to-earnings ratios (P/Es) with dividend yields of 3% plus. In Europe’s new stringent regulatory environment, these companies have retrenched tens of thousands of employees, drastically disposed of risk weighted-assets and significantly reduced their dollar funding costs while at the same time continuing to build their equity capital bases.
Domiciled in both Hong Kong and London, HSBC1 is an excellent example of these restructuring trends. I was in London in 2011 when the company’s new chief executive addressed investors and declared, “I have an eight-cylinder car that’s currently firing on four cylinders, and my job is to get it to fire on six cylinders.” To that end, HSBC has sold or shuttered 41 businesses, which generated $12 billion in new capital. The company fired almost 20,000 employees realizing $3 billion in permanent annual cost savings. By 2015, another $500 million in new cost savings will be achieved bringing the total annualized cost savings to $3.5 billion.
HSBC is trading at only book value with a P/E of 9 times while paying a 3.5% dividend. It is well capitalized and derives 70% of its earnings from the high-growth markets of Hong Kong, China, India, Latin America and the Middle East. HSBC is also Asia’s largest private wealth management company with a $330 billion asset manager, a small but very profitable investment bank and highly profitable treasury operation. HSBC also owns a 19.9 percent in Bank of Commerce China’s fifth-largest bank; this position is probably worth in excess of $7 billion.
Q: So what else is interesting in financial services? Credit Suisse1 is another important restructuring story. The stock is cheap, trading at 82% of book value and yielding 3.3%. The company is the world’s second-largest private wealth manager with over $1 billion under supervision. This business continues to generate about 5% organic growth in new assets under management. Credit Suisse also has a large asset management company and a much slimmed-down investment bank. There is very little lending risk at Credit Suisse and absolutely no sovereign-debt holdings. The salient story here is cost cutting. The company has already realized $2.2 billion in cost savings with a further $1.1 billion this year and an additional $545 million for both 2014 and 2015. When a sustained global economic recovery begins and market volumes pick up, Credit Suisse’s three primary businesses, with a vastly reduced cost structure, will see an enormous expansion in both revenues and margins.
Q: What other sectors are noteworthy? Building materials. Look at a company such as Heidelberg Cement.1 The company derives about 27% of its sales of cement aggregates and asphalt from North America. November marked the sixth straight month the Architectural Billing Index continued to remain in expansion territory. We see a sustained recovery in North America construction in 2013 driven by the residential housing market, improvement in the non-residential commercial market and recent congressional extension of the highway bill that will allocate $53 billion in both 2013 and 2014 for streets, roads and bridges. Heidelberg derives 40% of its earnings from emerging-market countries, including 20% from its large stake in Indocement, Indonesia’s second-largest cement company. Indonesia is experiencing a massive urbanization movement outside Jakarta, the capital. The urbanization trend galvanizes demand for cement and aggregates for housing and other infrastructure. Consequently, Heidelberg should see high single digit volume growth in this expanding market. Lastly, Heidelberg has been aggressively cutting costs: 241 million euro in 2012 and a targeted 150 million euro through logistics optimization in 2013.
Thank you, Marc
