Economix Blog: Why Europe’s Job Picture Looks Different

Fundamentally: Europe’s Markets, No Longer in Lock Step

Money managers point to signs like these: Investors barely flinched during the banking crisis last month in Cyprus, an indication that the Continent may be moving past its manic phase. The Vstoxx index, a measure of stock market volatility in the euro zone, is about half of what it was in the fall of 2011, when the region’s debt crisis spread to Greece and Italy. And Europe has actually been the best-performing major overseas market since the start of 2012, with equities surging nearly 19 percent.

“The markets get that it’s not 2011 anymore,” said Edward A. Gray, a co-manager of the Delaware International Value Equity fund.

But impressive as that change has been, the hard part may be coming now.

That’s because, until recently, the European market has followed a fairly simple, predictable pattern. When investors sensed that the fiscal crisis there was worsening, as in the late summer of 2011, European stocks sold off in lock step. Conversely, investors raced back into the region’s equities anytime there was better-than-expected economic news — like that of the second Greek bailout, in the first quarter of 2012.

Now that European stocks appear to be past these extreme swings, investors are “much more fundamentally focused and discriminating,” said Harry W. Hartford, president of Causeway Capital Management. That means European stocks “are not a homogeneous entity anymore,” he added.

Consider the performance of European stocks in the first quarter. While stock funds that invest broadly in the region returned 2.6 percent, on average, the stock markets of individual countries were all over the map. Greece, for instance, finished the quarter up more than 14 percent and Switzerland gained more than 10 percent. Germany, meanwhile, was flat, while Spain sank 6 percent and Italy fell nearly 10 percent.

Future success in Europe will require investors to distinguish not only among markets, but among sectors and individual stocks as well, money managers say. But it is becoming harder to find decent values among European stocks, said Kimball Brooker Jr., a co-manager of the First Eagle Overseas fund.

Broadly speaking, European equities still trade at lower valuations than domestic or Japanese shares. Yet the broad market’s price-to-earnings ratios don’t necessarily paint an accurate picture of the investment landscape, Mr. Brooker said.

For instance, a few years ago, it was fairly easy to find shares of high-quality multinational companies in the region that were trading at discounted prices relative to their American counterparts, simply because they were based in Europe. Today, those types of industry-leading companies — those with pristine balance sheets that generate a large portion of their sales in faster-growing areas like emerging markets — are becoming expensive.

These are companies like L’Oréal, the beauty products giant based outside Paris, and Diageo, the spirits maker based in London, said Charles de Vaulx, chief investment officer at International Value Advisers. Both stocks are trading at P/E ratios well above 20.

“These stocks are very pricey, but deservedly so,” he said, owing to their strong finances and geographic reach. But that leaves fewer apparent opportunities for value-minded investors looking to put new money to work.

“To find generally cheap stocks in Europe, you have to look for cyclical businesses that require you to believe that we’re on the verge of a major economic recovery,” Mr. de Vaulx said. “Unfortunately, we worry that European economies are decelerating.”

THIS explains why only about 57 percent of the assets in the IVA Worldwide fund, for which Mr. de Vaulx is a co-manager, are currently in equities. That’s down from 71 percent a year ago. Furthermore, only about 145 percent of the total portfolio is in European equities, with double that stake held in the United States.

European stocks are facing increasing competition for global investment dollars now that Japan’s stock market is finally rebounding, said Mark D. Luschini, chief investment strategist at Janney Montgomery Scott.

Japanese stock funds, in fact, soared 15 percent in the first quarter, more than their gains in all of 2012. And over the past six months, the MSCI Japan stock index has climbed by nearly 42 percent.

For European equities to continue to rally in the face of such stiff competition, from both Japan and the United States, “it’s going to require some kind of positive catalyst,” Mr. Luschini said.

In the short run, he said, he does not know whether any economic indicators will provide such a lift.

But over a five-year horizon, he says he thinks European markets could still turn out to be among the more attractive foreign destinations, especially if European companies can keep increasing their profitability while the economy slowly heals.

Paul J. Lim is a senior editor at Money magazine. E-mail: fund@nytimes.com.

Google Wins Time From Europe’s Antitrust Enforcer

After meeting with Eric E. Schmidt, Google’s executive chairman, the antitrust official, Joaquín Almunia, said in a statement Tuesday that “we have substantially reduced our differences.”

“I now expect Google to come forward with a detailed commitment text in January 2013,” said Mr. Almunia, the E.U. competition commissioner.

The meeting between Mr. Almunia and Mr. Schmidt came as regulators in the United States appeared to be backing away from what had initially been one of the centerpieces of an antitrust investigation on both sides of the Atlantic. Early on, regulators focused on a question that drilled to the core of Google’s business model: whether its popular Web search engine thwarted competition by favoring the company’s services in presenting results of search queries.

Recent accounts of the U.S. proceedings indicate American officials are no longer pressing the search-ranking issue. But Mr. Almunia is evidently continuing to hold Google accountable on that. He said Tuesday that in their discussion, the company indicated it would make changes in “the way in which Google’s vertical search services are displayed within general search results as compared to services of competitors.”

The other areas in which Mr. Almunia expected to reach a deal included the ways Google uses and displays content from other companies in its search tool, and the restrictions that Google places on advertising and advertisers. Any concessions offered by Google would be tested in the marketplace to assess their acceptability to other companies, Mr. Almunia said, before becoming binding.

If Mr. Almunia accepts a settlement offer, Google would avoid a possible fine of as much as 10 percent of its annual global revenue, about $37.9 billion last year. It would also avoid a guilty finding that could restrict its activities in Europe. “We continue to work cooperatively with the commission,” said Al Verney, a Google spokesman in Brussels.

Exactly what concessions on search services that Mr. Almunia can wring from Google remained an open question Tuesday, though antitrust experts agreed that he had more leverage than his U.S. counterparts.

While Google is the dominant search engine in the United States, it holds even greater sway in Europe, accounting for more than 90 percent of searches in a number of major markets. That is one factor giving the Europeans greater leverage in trying to set rules on how Google ranks competing services.

Another factor is European antitrust law, which has long given competitors more protection than U.S. law provides.

Antitrust law in Europe, and the commission’s approach to it, has shifted in recent years, raising the hurdles for complainants against dominant companies, said Emanuela Lecchi, an antitrust partner in London with the law firm Watson, Farley & Williams.

Even so, she said, Europe still offers rivals greater protection. Compared with the United States, Ms. Lecchi said, European regulators “are more inclined to try and make sure there is always a choice of players on markets, and that’s something that might allow Google’s rivals to make more progress at the end of the day.”

Some experts said the U.S. Federal Trade Commission could be playing a tactically clever hand by allowing the Europeans to push Google an extra mile. They suggested that the F.T.C. would be shielded from accusations it was attacking a U.S. champion, even though any concessions Google made to the Europeans on search were likely to apply globally anyway.

“The F.T.C. may be seen as outsourcing the more difficult parts of this investigation to another agency,” said Andreas Stargard is a competition lawyer and antitrust litigator in Brussels with the firm Paul Hastings. Besides, Mr. Stargard said, “the F.T.C. isn’t as expert in these complex antitrust matters as it used to be.”

As the scope of the U.S. investigation showed signs of narrowing in recent days, groups concerned about Google’s behavior, especially in online search, have been calling on the Europeans to ensure that any decision in the case would give them a better chance to challenge Google’s market share in areas like mapping and travel.

“It’s all very well dealing with the manifestations of abuses, but what the market really wants to know is how we get competition back into search,” David Wood, the legal counsel for ICOMP, an industry group based in Europe that includes Microsoft among its members, said Tuesday.

Earlier in the week, FairSearch, a group with most of its member companies in the United States and Europe, and that also includes Microsoft, asserted in a statement that “Google dominates more than 93 percent of the search market” in Europe. FairSearch urged Mr. Almunia to take the opportunity to “build on a record of leadership in global antitrust enforcement” by pressing Google for more concessions than in the United States.

Steve Lohr contributed reporting from New York.