According to the manager of the Polar Capital European Income Fund, the first point to bear in mind is, while quantitative easing is not a solution to the medium-term challenges of demographics, high debt levels and stagnating productivity, it is important not to dismiss the impact of quantitative easing in Europe. Investors should be more upbeat on the region’s relative prospects in the next 18 months, he said.
“Plenty of measures are now showing an improving outlook – house prices are rising, unemployment is falling and the bank lending surveys point to improving trends. Inflation remains low, although a big contributor to this is the fall in oil and that should be a tailwind for Europe.”
Second, while the market is not optically cheap and the unwinding of the Euro crisis fear factor has seen the region re-rate in the past couple of years, Davis says, in the context of a gradual improvement in earnings, investors will be rewarded for investing in the region as it continues to normalise.
“The dividend yields of high quality companies such as Nestle (yielding 3% in Swiss Francs and growing at least mid-single digit) looks very compelling relative to almost every other asset class. Solid compounding stocks are likely to get even more expensive in a low growth and low return world. In short, they continue to look competitive,” he said.
Finally, a depreciating Euro represents a headache for the region’s neighbouring economies as it reduces their competitiveness. The important thing is to identify vulnerabilities in a business from a bottom up view – and a big currency mismatch between costs and sales (in any currency) should be a red flag.
As a result, he said, low-risk equities with reasonable and growing dividends continue to look attractively valued relative to other asset classes. But, he cautioned: “Investors should perhaps be more sceptical on the prospects for high yielding stocks with no growth as they can be particularly vulnerable to uncertainty in the bond market.”
