Time to Buy Germany and the UK

09/23/2015 10:00 am EST

Focus: GLOBAL

Kevin Kelly is a leading expert on the EuroZone, specifically long-term opportunities among leading German and British stocks. Here, the chief investment officer of Recon Capital Partners, explains why diversified investors should be exposed to the top European markets; he also highlights some favorite ideas from Germany and the UK.

Steven Halpern :  Our guest today is Kevin Kelly, CIO of Recon Capital Partners. How are you doing today, Kevin?

Kevin Kelly:  I’m doing great, thanks for having me.

Steven Halpern:  Recon Capital offers the only US-listed ETFs to track the German DAX and the British FTSE 100.  They trade under the symbols DAX and UK. Can you tell our listeners why you launched these products and perhaps give an overview of the benefits and the type of investors they were designed for.

Kevin Kelly:  Yeah, absolutely, so we decided to launch these products because we wanted to get ahead of the current economic policies that are being implemented by not only the ECB and the EuroZone, but also the Bank of England.  

We’re starting to see a shift in policies over there that are more conducive to the global investing environment and so you’re actually seeing that play out in the market and in the corporate profits of the major blue chip stocks that are listed on the Frankfurt Stock Exchange as well as the London Stock Exchange.  

We see Europe growing not only on the continent, but also within the United Kingdom. They also support some of the largest, most developed markets that are safe for investors worldwide and globally to invest in because they’re very transparent.  

We wanted to launch this to give US investors direct access to the premier benchmarks in some of the world’s leading economies.  If you look at the United Kingdom and you look at Germany, they have the fourth and sixth largest economies in the world.  This gives people direct access to those premier benchmarks over here.

Steven Halpern:  So what type of growth should investors expect out of the EuroZone looking ahead to coming months as well as a longer-term view looking out to future years?  

Kevin Kelly:  What’s been great is the European Central Bank has started implementing the Quantitative Easing Program and that started in March.  We actually saw growth in the EuroZone pick up even before that, so the numbers coming out in January and February actually dictated that alone the economy was growing, investor confidence was coming back.  

One of the reasons why is actually you have lower input costs on the energy side, as well as the euro has come down. It has depreciated against the dollar, making their goods and services more compelling to international investors against US products.  

You have large-cap names like Bayer AG (OP: BAYRY), which is a big biopharma company.  It’s the number one holding in Germany.  Bayer saw their EBIDA grow 33% this last quarter and they’re seeing top-line revenues grow from the mid-to-high teens.  

That’s actually a benefit of having compelling pharmaceutical products that can be seen in the EuroZone, in Asia, as well as here in the United States and are advantageous in price now that the euro’s gone down 30%.  

Steven Halpern:  You’ve chosen to focus on both Germany and Great Britain. How do those two markets compare with other countries in Europe and is that enough European exposure for US investors?

Kevin Kelly:  One of the reasons why we’ve picked Germany and solely focused on a single country on the continent in the EuroZone is because they account for 30% of the GDP of the EuroZone.  They’re basically the locomotive engine over there on the continent.  

With that being said, they have great manufacturing prowess.  They are an export country, so with the backdrop of quantitative easing, as well as the euro depreciating, they are set to benefit the most out of any other country on the continent.  

Now, when we look to the United Kingdom, they just put their election behind them, and so, you are able to see the conservative party actually take some great gains.  

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Not only in the re-election of the Prime Minister, but also in the house as well, so they can implement policies that are more beneficial for companies that are listed there. They have the election behind them and are actually supporting the best growth out of any developed nation.  

They are expected to grow 2.8% this year alone. They’re actually expected, in our eyes, to raise their interest rates in lockstep with the Fed, or maybe even before the Fed, because they are getting great inflation, they’re near their target, as well as wage growth.  They have a strong economy that’s going to benefit from not only the rebound in Europe, but also with their relationship with the United States.  

Steven Halpern:  In terms of specific companies, maybe you’d be kind enough to share a few names of what you think might be the best buys for those investors looking for specific companies.

Kevin Kelly:  Yeah, that’s a great question because how we look at investing is—a lot of times—even here in the United States, we recommend people should buy the S&P 500 (SPX) (SPY) and then also pick a couple names that they like from those indexes and overlay them and purchase those as well.  

Starting with the FTSE 100, one of the names that we are really fascinated by is ARM Holdings (ARMH).  ARM Holdings actually has an ADR here listed in the United States on the NASDAQ.  It’s ARMH.  

They are actually trading right now below their five year historical PE level. One of the reasons why, they are actually a main supplier to Apple (AAPL).

As Apple had an overhang, it actually took down ARM Holdings.  What ARM Holdings does is they actually produce the IP and designs for semi-conductors.  

They have over a billion chips that are out there currently in the marketplace that use their technology and they’re really focused on the Internet of Things.  If you look at last week, they inked a deal with IBM (IBM) who’s actually going to take all the data in all of their chip sets, aggregate it, put it in the cloud, and use that for their benefit.  

Another way to look at it is Qualcomm (QCOM) actually licensed this ARM technologies and IP for their Snapdragon processors.  If we look at last quarter earnings we saw their gross margins increase from 95.8% to 96.3% gross margin.  

They’re unfairly being punished right now, we believe, in the current marketplace, given the volatility and overhangs with Apple, but we think it’s one of the best positioned semi-conductor technology stocks going into the future. They are a member of the Footsie 100.

Steven Halpern:  What about in Germany, is there an idea there that stands out in your mind?

Kevin Kelly:  Yeah, one of the names I’ve previously mentioned was Bayer.  Bayer is a top contingent over there. They’re doing very well, so that’s a name.  A name I haven’t highlighted is actually BMW (OP: BAMXY) or Daimler AG (DDAIF), either one of those top luxury automobile manufacturers.  

They’ve been beaten up recently because they’re expected to have lower profits given the Chinese volatility.  

What’s interesting about both of their products is that they’re really insulated from a lot of the volatility and consumer overhang in China because they fell to the top market. In the top markets we’ve seen, with luxury goods and demand, hasn’t been impacted by the slowdown that’s currently happening in China.  

It’s really effecting the middle and lower class, and on the consumer stable side, not the luxury side.  We saw yesterday that Morgan Stanley (MS) even upgraded BMW because they have been unfortunately punished due to the Chinese overhang.

Steven Halpern:  Again our guest is Kevin Kelly of Recon Capital Partners. Thanks for your time. I really appreciate it.

Kevin Kelly:  Thank you so much.

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