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Sept. 26, 2011, 12:00 a.m. EDT
By Brett Arends, MarketWatch
BOSTON (MarketWatch) "” Europe is bust. Buy Europe!
That, at least, is the call from the smartest investor I know "” Crispin Odey, a hedge-fund manager in London.
"It may be confusing to find someone who believes that a crisis is on its way but is also happy to buy equities ahead of the crisis," he writes in his latest bulletin to investors. "My reason is that the worries have been there for so long, the causes are so obvious and the valuations are so cheap that this is a case of buying early. For me the crisis will bring resolution and with it higher prices."
(The resolution, he says, is that the banks there will need recapitalizing. It has to happen.)
Should you buy on the dips? That's what at least some investors are wondering after the Dow posted its biggest weekly decline in nearly three years. Jason Zweig on The News Hub weighs in on the subject.
The "geopolitical outlook" for the world, Odey admits, "is unresolvably bad." However, at these levels investors are "not only being paid to be patient by high dividend yields," but shares are "also pricing in a very high margin of safety."
How cheap are stocks? In Europe, he says, "Equities yield 5-6% and many are on earnings yields of 20-33%. They are mouth-wateringly attractive."
Odey is a legend in London "” an affable genius who makes his money buying the investments everyone else is too afraid to touch.
Global Dow
For investors stateside who've never heard of him, he's worth following. His flagship hedge fund has made his investors rich since it was launched in 1992. An initial $1,000 stake would now be about $9,800. By contrast, the same investment in the FactSet World index of global equity markets would have left you with about $4,300, and your Vanguard Balanced index fund of U.S. stocks and bonds just $3,800.
Be aware that Odey has a habit of buying a little too early, and he is the equivalent of a "black run" skier: He'll go where few dare to follow. (He is a "strong buyer" of British and American bank stocks right now.) His latest bulletin was written a few weeks ago, before markets tumbled further. Western European markets overall are down about 15% since then.
Yet Europe today certainly passes the most obvious test for a contrarian: Everyone else is too afraid to invest. Imagine a portfolio manager trying to make the argument to an investment committee. Imagine a financial adviser trying to explain it to Mrs. Jones.
Investors, naturally, want to wait for the resolution of the crisis before committing any funds. However, markets don't always oblige us by staying cheap until the coast is clear. They are forward-looking creatures.
And while we can't know the future, we can know present valuations.
FactSet says Western European markets overall are now nine times forecast earnings, and sport a dividend yield of 4.2%, levels not seen "” apart from the depths of the 2008-9 crash "” for a generation.
Spain yields 6%. Italy: 5.6%. Even Germany is at 4%.
For U.S. investors, one cheap and simple option is the Vanguard MSCI Europe exchange-traded fund /quotes/zigman/1490143/quotes/nls/vgk VGK +0.32% . The fees are just 0.14%.
A fall in the euro would help many of the companies, especially exporters.
Odey thinks the U.S. economy will pick up in the fourth quarter. "Yet again we may be entering a period when markets do not get a Greek default and the U.S. economy strengthens. Cyclicals, which have all been sold off, will rally and banks, which have led the market down, will catch a bid [i.e. rise]," Odey writes.
We shall see. He's not always right, but he usually is.
Brett Arends is a senior columnist for MarketWatch and a personal-finance columnist for the Wall Street Journal.
Brett Arends is an award-winning financial columnist with many years experience writing about markets, economics and personal finance in Europe and the U.S... Expand
Brett Arends is an award-winning financial columnist with many years experience writing about markets, economics and personal finance in Europe and the U.S. He has received an individual award from the Society of American Business Editors and Writers for his financial writing, and was part of the Boston Herald team that won two others. He was educated at Cambridge and Oxford Universities, and has worked as an analyst at McKinsey & Co. He is a Chartered Financial Consultant (ChFC) and Accredited Asset Management Specialist (AAMS). His latest book, "Storm Proof Your Money," has just been published by John Wiley & Co. Collapse
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