Western Europe. The Old World. Stodgy. Boring. Who wants that?
I do, actually. Rather than dismissing it as old, I contend that Western Europe offers you the best of all investing worlds: strong multinational companies, well-regulated and liquid markets, business leaders who treat shareholders as partners, and quality companies that trade at reasonable valuations. And for those seduced by growth stories, you can get those, too -- just in a "kid-friendly" form.
Safety in the stodgy
The problem with China is that it's exciting. And because it's exciting, everyone needs to invest there -- right now! But because everyone "knows" it's the next big thing, prices shoot up, and explosive growth assumptions get baked into equity prices. And history has repeatedly shown that chasing such excitement is a recipe for underperformance -- unless you're an adept market timer. Everyone reading this got out of tech stocks before March 2000, right?
Investors in Western Europe get the best of both worlds. You get world-class companies that -- true -- have not seen anything like the growth in China over the past few years, but they've continued to lower their cost bases, drive innovation, and boost their cash flows. But you can take advantage of China's newfound prosperity, too. Capital, like water, seeks its lowest level, and for many European companies, this means headquartering in Germany, France, or Holland, but farming out the easily outsourced tasks to lower-cost countries like China. The benefits of low-cost locales flow to the first-world companies.
Conversely, China represents a huge lottery ticket. A few will get absolutely filthy rich investing in China. Were you to ask me to predict the locale with the single company that will deliver the highest shareholder returns over the next decade, I'll give you no argument. I fully expect it to come out of China. But don't forget that greater reward purportedly comes with greater risk. And I think the investing world's focus is squarely on the reward side of the equation. Picking the right companies in China will be fraught with peril and will require a fair amount of luck. And even the quality companies are pretty fully priced. Better to hunt where others have given up.
Western Europe: quality, world-class companies
Like consumer staples? It's hard to get much better than Nestle and its products that reach into nearly every household in the developed, and developing, worlds.
Still bullish on energy? I've always been partial to BP (NYSE: BP ) myself, not only because of its oil operations, but also because of its very strong alternative- energy and environmental leanings.
How about banking? Remember, this is the continent that gave us the concept of Swiss bankers. Some of Western Europe's power players include ING Group (NYSE: ING ) and Deutsche Bank (NYSE: DB ) -- strong banks boringly going about the business of turning money into more money. You could even get a little crazy and buy into HSBC Holdings (NYSE: HBC ) with its dual Chinese and British pedigree.
Or think about Swedish company Autoliv (NYSE: ALV ) . The world leader in automobile safety systems (think airbags -- and I don't mean politicians) has consistently shown itself to be the industry pacesetter, developing nearly every automobile safety innovation of the past quarter-century. All the while, it has steadily improved margins and returned value to shareholders through rising dividends and share repurchases. And you get it for 15 times earnings!
And the icing on the cake is that European companies tend to pay robust and rising dividends.
Where's the growth?
Why head to China if you like a good growth story? Coming out of little Holland is GPS navigation specialist TomTom. Trailing-12-month revenue and earnings are up 272% and 305%, respectively, and you get a 75% return on capital into the bargain. Or consider a flyer on nanotech specialist Flamel Technologies (Nasdaq: FLML ) . Sure, there's no cash flow to speak of, but it's got the lottery-win "Rule Breaker" potential, like so many Chinese candidates.
The Foolish last word
If the first rule of investing is "don't lose money" and the second rule is "see Rule No. 1," then Western Europe is hard to beat.
Much of China is disqualified simply on a valuation basis. Growth is great, but it must come at a reasonable price. Your purchase price today is what will drive your returns going forward. And while I expect that China will evolve many of the same protections and institutions that the West has (and probably at a faster rate), it doesn't change the long-term reality that an investment, any investment, is worth only the discounted sum of cash flows that can be taken out of it from here to eternity. As China grows and evolves, there will be plenty of time and opportunity to invest there. But give me the Old World for now.
Western Europe is facing China in this Investing World Cup match. Go back to the intro page to navigate your way to another part of this contest, and then vote for the region that you think should advance to the next round of the tournament.
Flamel Technologies is a Motley Fool Hidden Gems recommendation. Take the newsletter for a30-day free trial.
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Jim Gillies owns shares of Autoliv. He is a member of theMotley Fool Hidden Gemsnewsletter team.
This article represents the opinion of one Fool and should in no way be taken as the opinion of either The Motley Fool, Inc., or the company in question, or as representative of anyone or anything other than that specific Fool's thoughts. So before buying, do your homework and review The Motley Fool's superbly sportsmanlikedisclosure policy.