Six surprising opportunities amid stalling markets

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The way Wendell Perkins sees things, today's stock market is defined by two big concerns – and several buying opportunities.

The senior portfolio manager at Manulife Asset Management is focused on international stocks beyond the United States, but recognizes that the landscape isn't exactly littered with bargains.

"The good ideas don't last long," he said.

For sure, part of the problem is that the world's major stock market indexes have surged to levels that make stocks appear fully valued at best.

The S&P 500 is up nearly 190 per cent from its low in 2009, Japan's Nikkei 225 has rallied more than 40 per cent since the start of 2013, Canada's S&P/TSX composite index is near record highs, emerging markets have rebounded about 18 per cent since February and European stocks are up 65 per cent since the depths of the euro zone debt crisis in 2011.

But Mr. Perkins is more concerned with what he calls a correlation of mistakes: Increasingly, investors are believing the same thing – Europe is recovering from its sovereign debt crisis, Japan is emerging from its decades-long slumber, the U.S. economy is humming and China is a financial danger-zone.

But with just about everyone betting along the same lines, an unexpected lurch could be costly.

"That's when markets get shocked," he said.

He is also alarmed by the degree to which financial engineering is driving the market: The world's central banks have used monetary policy to push investors into taking risk, raising the possibility that investors have grown addicted to ultra-low interest rates and bond-buying stimulus programs.

These policies have helped lift the global economy from the brink of disaster, but they haven't yet delivered sustainable growth.

In the United States, Mr. Perkins points to the creation of mostly low-paying jobs, so-so retail sales and a still-troubled housing market. In Europe, the sovereign debt crisis remains a simmering threat.

As for Japan, its economic reforms – dubbed Abenomics – appear stalled. The yen isn't moving lower, wages are still falling and a plan for the country's pension fund to ramp up its exposure to stocks comes with a problem: How does the fund unload its big holdings of government bonds?

Given these concerns, it shouldn't come as a surprise to hear that Mr. Perkins is a defensive investor. Yet, he suggests that there are buying opportunities in some unlikely areas, including European telecommunications, select financials and Chinese energy firms.

The characteristics that tend to define them: Generous cash generation, low valuations based on cash flow and relatively low debt levels.

European telecoms have been weighed down by the region's dismal economy and regulatory concerns, but regulations are now easing and the sector could benefit from a round of mergers.

Even following a recent rebound, some names remain cheap. He singles out France's Orange SA, which trades at five-times free cash flow and comes with a good dividend yield of 5.7 per cent. The Netherlands' KPN NV also looks like good value based on cash flow.

He's wary of most European financials, but two stand out as compelling ideas. Barclays PLC trades below book value, owns a great domestic banking franchise in the U.K., and isn't exposed to euro zone debt issues. Yes, it has risks, but they are priced in.

Similarly, France's BNP Paribas SA also trades below book value after the share price reacted to news that the bank may have to pay a $10-billion (U.S.) fine for allegedly violating U.S. sanctions against Iran. But as Mr. Perkins said, "Nothing is broken within BNP" and it shouldn't have to raise capital to meet regulatory requirements.

In China, the country's energy behemoths look like stand-outs. Sinopec, a refiner, and CNOOC, the global energy producer that recently acquired Canada's Nexen Inc., trade at significant discounts next to their global peers. CNOOC, for example, trades at less than 9-times earnings. The companies also have very little debt.