Sunday Morning Coffee

Sorry for not posting for the last couple of days I've got a lot going on that I'll mention in subsequent posts. But for now there was a very instructive passage in this week's Barron's that I think underscores a point I have tried to make over the years;

Shouldn't Europe cost less [meaning have lower valuations], given the news backdrop?

Enthusiasts for the continent say no. First, because many "European" companies are really global companies that happen to have their roots and headquarters in Europe. From luxury goods to heavy machinery, pharmaceuticals to telecom equipment, iconic Europe-run corporations get most of their sales, and certainly most of their expansion, elsewhere. "The days of looking at where a company is based to assess its growth opportunities are way in the past," says George Evans, chief of equities at Oppenheimer Funds.

Obviously the context is multinational corporations based in Europe, usually conversations like this in print or on TV are about US multinationals. Many people believe that multinationals are proxies for foreign markets because they generate some portion of their revenue from foreign markets. My contention has always been that multinationals are beneficiaries of foreign markets not proxies for foreign markets.

Embedded in the passage seems to be a sense of disbelief or a feigned lack of understanding as to why European multinationals have not performed better. Obviously any stock can do any thing in any type of market but I believe it is very unlikely that a relative mega cap (so it will be a large component of the benchmark index) from some country will go up 20% in a year that the benchmark index for that country goes down 20%.

For example long time client holding Vale (VALE) has had a good year fundamentally in my opinion but the share price is down 24% which is somewhat consistent with the Bovespa. Vale is obviously a multinational company but Brazil is digesting some top down issues and Vale's share price has not been immune but I never expected it to be; it is a proxy for Brazil.

Evans from Oppco, the strategist quoted above, could be right but he is calling for an existing dynamic to change and I believe that is unlikely to happen. I've made comments about the world getting flatter in terms of being able to access more places in the world but I do not believe it is flatter in the context of the above quote.

People love to go after this idea which of course is legit but this one seems pretty obvious to me.