Whenever we're asked for an outlook, we're always reminded of the words of our founder, Sir John Templeton: “I never ask if the market is going to go up or down because I don't know, and, besides, it doesn't matter. I search nation after nation for stocks, asking: 'Where is the one that is lowest priced in relation to what I believe it's worth?'”
Regionally, Europe remains a focus. Europe has been hampered by the limitations of its banking system and political structure, but the generally positive results of the system's comprehensive assessment and the formation of a pan-European banking union supervised by the European Central Bank should go a long way in restoring confidence and improving liquidity in the European financial system.
(More: Europe and Asia may be a mess, but long-term investors can find opportunities there)
Compared with its developed-market peers, Europe also maintains the broadest scope for additional monetary and fiscal stimulus. Finally, many European corporations remain relevant and competitive globally, with geographically diverse revenues and high operating leverage.
EMERGING MARKETS
Select emerging markets have also become more interesting to us following two years of marked underperformance versus their developed world peers.
We have found selective value in China, though the environment remains challenging given significant economic imbalances and a highly politicized business environment. Our focus in China is on finding companies with balance sheet strength, capital discipline and the ability to sustainably generate strong free cash flow.
Elsewhere in Asia, value appears to remain relatively scarce in Japan, where many larger companies are conglomerates with secondary positions in industries we find unattractive. Corporate Japan has traditionally prioritized stakeholders over shareholders, which has pressured equity returns and made the country's relatively low price-to-book multiple warranted. What Japan needs most are structural, regulatory and corporate reforms to promote higher returns on equity, consumption and capital expenditures.
(More: How currency hedging saved portfolios in 2014)
Finally, the U.S. is a stock picker's market. The U.S. appears to be furthest along in its recovery and headline stock valuations at the end of December certainly reflected that, but this is a deep and diverse market and we are still finding what we view as bargains at the stock level.
We are finding attractive ideas across most major sectors, though a few warrant special mention. For example, as of early December, energy stocks were trading at their lowest valuations in decades.
Financials remain selectively attractive. We expect our core European bank holdings to continue to improve profitability following a period of restructuring and recapitalization, and we are also finding attractive opportunities among diverse financial firms elsewhere in the world. In health care, we expect our major pharmaceutical holdings to continue to consolidate value, and we also maintain a positive outlook for our less mature holdings in biotechnology, where long-term growth appears underpriced.
Norman J. Boersma is chief investment officer, and Cindy L. Sweeting is director of portfolio management, at Templeton Global Equity Group.
