Long-term investors go bargain-hunting in Europe
Long-term investors with deep pockets are scanning Europe for lucrative investment opportunities even though a lasting solution for the euro zone crisis is not yet in sight.
Despite persistent gloom about the ability of Europe's political elite to quickly solve the region's woes, multi-billion dollar investors such as pension and wealth funds are not completely shunning Europe.
Instead, some of the world's biggest investors are tempted by the cheap valuations of the continent's top corporate stocks and look with favour at investing in illiquid but crucial assets such as infrastructure, according to more than a dozen investors and bankers who spoke to Reuters.
These investors are also attracted by assets that cash-strapped banks and euro zone governments are expected to put on sale in what is expected to be a massive deleveraging wave. And they are not shunning stocks of European blue-chips with good fundamentals and a global exposure.
Fixed income - especially government bonds in the weaker euro zone states - remains a taboo, however, with many wanting more concrete steps in mending the bloc before dipping in.
"In spite of the fact that obviously Europe is having troubles, it does not mean that there are no investment opportunities," said Mark Wiseman, executive vice-president for investments at the Canadian Pension Plan Investment Board while attending the World Economic Forum in Davos.
"We actually believe that there are substantial investment opportunities in Europe, for instance in areas like infrastructure," he said.
The CPPIB, who is looking at investing in gas infrastructure in Norway, looks after around $150 billion US for future pensions.
Purchases by pension funds in European infrastructures have so far concentrated in European countries that are outside the euro zone area.
The Ontario Teachers' Pension Plan, with assets worth around $110 billion, controls High Speed 1, Britain high-speed railway link between the Channel and central London. The fund agreed in June to swap its interest in Sydney airport with stakes in Europe-based Copenhagen and Brussels airports.
THE GREAT SALE
European banks, which collectively hold around 40 trillion euros of assets, are expected to sell at least 3-5 trillion euros of these in the coming years to comply with new, stricter international rules on quality capital and liquidity.
Some of these assets are real estate, but the banks are also selling entire divisions of business or portions of their balance sheet, like loans.
"We are going to see a re-definition of the ambitions of many bank players who had global or even pan-European aspirations," the head of a top European bank said.
The banks may also end up owning stakes in companies or entire non-banking businesses as the crisis pushes more and more of their debtors into bankruptcy. These will also come onto the market, top bankers say.
Other buying opportunities are represented by assets governments of weaker euro zone states are planning to sell to bring down their large public debt.
"We think the deleveraging that is going to go on in Europe and with the banks could very well be an opportunity to acquire assets," said Jim Leech, Chief Executive Officer and Chairman of the Ontario Teachers' Pension Plan, with assets worth around $110 billion.
Italy, which holds 1.9 trillion euros of public debt, is expected to announce a sale program that may include property assets, potentially worth 5 billion euros, as well as stakes in large state-owned utilities.
Assets that could be up for grabs in Spain include the lottery business, concessions on airports, water business and even the famed Paradores hotels.
These assets are also potentially lucrative for individual wealthy investors, even though they have less firepower to concentrate on these deals.
"The next area of interest will be distressed investments in Europe. The pricing is not there yet. But there are a lot of assets coming off the banks' balance sheet. That will be an interesting opportunity," said Jane Fraser, head of Citi Private.
After a rollercoaster year that brought the euro zone to the brink of a potentially disastrous break-up and shattered equities valuations, institutional investors are tempted to go back into some of the better stocks even though they may face a few rocky years.
European stocks took a hit in 2011, burning many investors, who pulled out towards the end of last year and missed the most recent rally.
"For a long-term investors...we see the challenges that are facing Europe now also representing investment opportunities. You have got distressed asset classes with prices well below medium-term fair price valuation," says Adrian Orr, Chief Executive Officer of the New Zealand SuperAnnuation Fund, which is worth nearly $18 billion.
"I am not saying it is easy to do, but it is necessary. We (long-term investors) should have an advantage over people, we should resist running with the fashion of the day," says Orr, whose fund held about 20 percent of its assets in Europe at the end of June.
Euroland equities fell heavily in October 2011, when the euro seemed headed towards financial disaster. Despite rebounding, with a discount of 25-30 percent they are still much cheaper than US equities, looking undervalued both in absolute terms and relative to other regions.
"Euroland equities, which are much cheaper than U.S. equities and are currently shunned by investors, have the potential to spring positive surprises," says Burkhard Varnholt, head of investments at Switzerland-based wealth manager Bank Sarasin.
While non-financial shares and private equity could represent a source of potential return for those convinced that the euro zone will not blow up, getting into fixed-income requires more guts despite attractive yields.
A collective downgrade of most euro zone countries by Standard & Poor's has left Germany as the only major EU economy with a top-notch AAA ratings, keeping pressure on euro zone banks' and sovereign bonds' credit spreads.
The European Financial Stability Fund (EFSF), the main bailout instrument through which Europeans are hoping to solve the euro crisis, also lost its AAA rating, casting a cloud over its ability to attract investments.
Japan has so far bought 3.7 billion euros of EFSF bonds out of the 22.5 billion euros sold as of last week.
Norway, home to one of the world's biggest wealth fund, however, sounded cautious towards the end of last year about investing in the EFSF, in which it held less than 100 million euros. It is a view shared by some big Asian investors.