Europe’s Cheap Stocks Set For A Long Catch-up Rally

Leighton has been under investigation by the Australian Federal Police since at least February 2012 after the company reported potentially illegal activity at its subsidiary Leighton Offshore Pte. in Iraq . King denied the allegation and a spokeswoman for Stewart declined to comment. Randgold Resources Ltd. slid 3.5 percent and Fresnillo Plc, which produces gold and silver in Mexico , tumbled 8.7 percent as prices of precious metals fell this week. A gauge of mining companies was the worst performing group on the Stoxx 600. Schibsted ASA surged 11 percent to the highest price since at least 1992 after Goldman Sachs Group Inc. began coverage of Norway s biggest media company with a buy rating. The company is quickly shifting focus to online classifieds, which offer much higher and more stable growth prospects, Goldman Sachs analyst Markus Iwar wrote in a note, adding the stock to the brokerages conviction list. To contact the reporter on this story: Namitha Jagadeesh in London at To contact the editor responsible for this story: Andrew Rummer at Frankfurt Stock Exchange Ralph Orlowski/Bloomberg The DAX index curve is displayed on an electronic board at the Frankfurt Stock Exchange. Germanys DAX retreated 0.4 percent, while the U.K.s FTSE 100 lost 0.9 percent. The DAX index curve is displayed on an electronic board at the Frankfurt Stock Exchange.

By Mark Thompson @MarkThompsonCNN October 3, 2013: 8:27 AM ET Greek Prime Minister Antonis Samaras has stuck to the task of painful economic reforms. LONDON (CNNMoney) Investors are scouring Europe for ways to make money from its tentative recovery, and one U.S. firm thinks it has found the answer — buy Greek government bonds. Japonica Partners said it believed Greek debt was “massively undervalued” and should be rated several notches above the junk status assigned by the big credit rating agencies. Greece has been shut out of international bond markets since 2010, when its government borrowing spiraled out of control. It has been rescued twice by the European Union and International Monetary Fund and was forced to restructure its debt in March 2012, imposing losses of more than 100 billion euros on private bondholders. Related: Europe’s recovery is weak, warns ECB But hedge funds — such as Dan Loeb’s Third Point — and other niche investors who bought into Greek debt since the restructuring have made a killing. Yields on Greek 10-year debt in the secondary market have plunged from around 44% in March 2012 to 9%. Japonica’s statement was greeted with derision by some investors Thursday, but the firm that made its name restructuring bankrupt Allegheny International in the early 1990s believes it has spotted an opportunity others may have missed. It claims to have become one of the larger, if not the largest, holder of Greek government bonds, and has hired a former senior executive from Norway’s oil fund — one of the world’s biggest investors — to help manage the portfolio. Related: Investors embrace European stocks “Greece is one of history’s most extraordinary sovereign rejuvenations hidden in plain sight by pervasive systemic misperceptions,” Japonica said, adding it expected yields should break below 5% in 2014. It’s a bold prediction but Japonica may have a point. Greece’s headline economic data and social crisis remain as depressing as ever, and it may yet need another 10 billion euros in support. Still, the government is on track to deliver a primary budget surplus — stripping out the cost of servicing its massive debt this year — and hopes to return to the bond market in the first half of 2014. And the first green shoots of growth may be emerging.

Greek bonds: Europe’s hidden gem?

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Typically, stock market rallies start with investors snapping up the most stable, “quality” companies, before moving into stocks with the best earnings growth prospects. When that trade becomes crowded, they pour into whatever is still cheap, before ceasing to buy altogether. That final phase has now started: for the past three months, value funds invested in Europe’s cheapest large caps have attracted more money than those buying firms for their growth potential, according to Morningstar. After lagging for four of the past five years, value stocks – now touted by JPMorgan, Societe Generale, Nomura and Natixis, among others – have a lot of catching up to do. On a stock price to earnings basis, the gap between value stocks and growth shares is among the widest seen in the past decade, according to Thomson Reuters Datastream. “Finally, you have some areas of the market that are becoming investable again – banks, peripherals. They have massively underperformed for three or four years because of economic activity in Europe, political uncertainty, etc. The catch-up could take a few years,” said Emmanuel Cau, equity strategist at JPMorgan. Top weights in the MSCI Europe Value Index include bank HSBC , and energy giants BP, Royal Dutch Shell and Total. While the STOXX Europe 600 trades at 12.6 times next year’s expected earnings, according to StarMine, HSBC trades at 10.4 times, BP at 7.7 times, with Shell and Total both at 8.2 times. The amount of money invested in European large-cap value equities was 24 billion euros ($32.49 billion) by the end of August, half as much as five years ago, Morningstar data shows. “The common theme is catch-up by lagging assets. That’s a late-cycle theme,” said Christopher Potts, head of economics and strategy at Cheuvreux. “We’re not going to do it in six months.