5 Contrarian Reads

For all that is written on the topic, the key to beating the market can be boiled down to a single concept: variant perception. In order to earn a return that is different from the market average, you need to do different things, based on views that are different from the consensus. Here are some of the best contrarian articles I read this week:

The U.K. in the European Union: The Groucho Marx criterion
Should the U.K. remain in a club that counts it as a member? Last week, the U.S. publicly aired its concern regarding the possibility that the U.K. might leave the European Union. (The British government is planning a referendum on the issue.) Wolfgang Munchau argues in the Financial Times that it does not really matter if Britain leaves [free registration required]:

People [in the U.K.] are asking themselves a perfectly logical question: since we are not in the eurozone, nor likely ever to become a member, what is the point? In macroeconomic terms, EU membership is virtually irrelevant for a member state that is simultaneously large and not in the eurozone. The EU budget is tiny, and free trade and free capital movement would continue under any conceivable scenario. There may be reasons to stay in the EU, but whatever they are, they are not macroeconomic.

As far as other reasons go, Simon Mays -- professor of philosophy at Oxford, former Cabinet member of the European Commission, and a self-described "passionate European" -- doesn't find them compelling [free registration required]:

Both the US and EU need Britain as an ally, and it will have a bright future as a semi-independent broker in world affairs. The greatest advance in Middle East peace for decades -- the 1993 Oslo accords -- was brokered by Norway, precisely because of its independence. If Norway can do it, Britain can do it in spades.

Is the last bear capitulating?
Societe Generale strategist Albert Edwards, hailed by the FT as "the most dogged 'bear' in the City of London," may be waving the white flag. At SocGen's annual Global Strategy Conference, Edwards was overheard saying that European stocks are "unambiguously cheap" and recommending them to any investor willing to own them for 10 years, even going so far as to refer to "a once-in-a-lifetime opportunity."

In his latest Global Strategy note, published on Tuesday, Edwards expands on this theme [free registration required], but he's less categorical:

Despite remaining maximum underweight equities myself (for another leg in the secular equity valuation bear market), I am starting to think the move by institutions away from equities has gone too far. Solvency, regulatory, and asset/liability modelling arguments are forcing institutions into a sub-optimal asset allocation -- and one from which they have no intention of reversing. ... As equities over the next few years become the cheapest for a generation, they will be even more shunned. What an incredible opportunity this should then represent for defined contribution schemes and retail investors.

Banks: There are lies, damned lies, and...
Research firm Morningstar warns that European banks' equity cushions remain thin:

European banks' Core Tier 1 ratios continue to compare favorably with those of U.S. banks and are generally at or near the 10% level we see as a market-imposed target. ... However, European banks' ratios of tangible common equity/tangible assets, after adjusting for differences between U.S. GAAP and IFRS accounting standards, vary significantly and have improved very little over time. ... In large part, the misleading combination of high regulatory ratios and low TCE [tangible common equity] ratios is a product of the way that Basel capital rules measure risk -- the banks' hefty portfolios of sovereign debt, for example, are viewed as riskless and therefore the banks are required to hold no capital against them.

Oddly, major European banks are, on average, more expensive than their U.S. peers:

Market prices for European banks have risen substantially since our last update, and major European banks are now trading at 105% of our fair value estimates and 105% of tangible book value, on average. In contrast, the big four U.S. banks, which are far less exposed to further turmoil in the eurozone, trade at 97% of our fair value estimates and only a slightly higher premium to tangible book value, 111%. We currently see the greatest value in some of our highest-quality names, Julius Baer and Wells Fargo (NYSE: WFC  ) , which offer an average 16% discount to our fair value estimates and little risk of capital destruction.

Enjoy the long weekend, contrarian Fools!

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