Bottom fishing-1:Europe

if you are a Warren Buffet admiror, you must also be, by definition, a fan of contrarian investing. It can be a rewarding proposition, but only if you have the courrage, patience and perseverance of Warren Buffet.

Other than Canada, several international markets have under-performed the US so far this year. Arguably, investing in such markets, is contrarian. For this partucular note, we have selected Europe, largely on the basis of reasonable valuation and robust corporate earnings.

But first let's get the bad news out of the way. Starting wih trade war rhetoric, news has just recently resurfaced that President Trump is still weighing imposing tariffs on car imports, particularly in the wake of the GM plant closures. If this is the case, it will inflict serious damage on major European economies, particularly Gernmany and France. Europeans had previously indicated that they would go all-in and retaliate with massive, disproportionate tariffs on a number of US products. It could be all-out war.

Other factors mainly center around the prospect of the whole European Union disintegrating, starting with Brexit, followed by Italy's withdrawal. In terms of Brexit, there is too much uncertainty to try to venture a guess. One thing for sure though is that the majority of British do realize now that the vote in favour of Brexit was not what they were told it was, and that exiting the Union is not as simple as entering it. If the deal is not approved by parliament, alternatives will range from another referendum to mere chaotic divorce.

AS far as Italy is concerned, the case for anti-EU rhetoric is simple. The Union has simply not been good for Italy. For the past 20 years or so, economic growth has been sluggish and Italians see limited economic benefit from being part of the Union. Of course, the root cause is not the Union itself but the lack of political courgage by Italian governments to pass unpopular measures that would serve the country in the long term. Unfortunately, politicians will not admit that because blaming the EU garners more votes in the polls than admitting failure.

All being said, to invest in Europe, you have to be a strong believer:

That much of the bad news around trade wars and the risk of disintgegratioin has already been discounted in equity prices, and that a P/E rato of 14 times for the MSCI Europe (on trailing basis) is a compelling metric.

That President Trump is a deal maker and that a trade agreement will ultimately be reached just as one was concluded with Canada and Mexico. After all, President Trump is primarily after China. His tough stance towards Europe and Canada has been intended to show the Chinese that he is not afraid of taking tough action.

Finally, that cool heads will prevail and that politicians will keep the Union together because the cost of disintegration is too high for anybody to bear.

If all this sounds like a tall order to you, then you should just sit and watch. But waiting for the good news to surface before you invest in Europe will not do it for you because this is not how it works. Markets move in anticipation and, by the time the good news is out, the rally will have already reached an advanced stage. There are some clear bargains in Europe that an astute fund manager cannot miss. So if you think this is a good entry point, our FundScope Choice selection offers a handful of superior performers on a risk-adjusted basis. You will find that choices are limited but that's how it is. When we said the FundScope Choice selection is an exclusive club of funds, we meant it.

November 29, 2018

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