One of the key drivers behind the expected improvement in earnings has been the weakening euro. There are also a number of other factors – including the lower oil price, improving fiscal policy, the easing of deleveraging and increased corporate investment. The European Central Bank’s quantitative easing programme has also dominated recent headlines.
While these factors are a solid starting point when thinking about equity returns overall, we believe the outlook is inherently more stock-specific than it has been for some time. Recent policy stimulus will take time before we see any positive impact, and the recovery at this stage remains somewhat embryonic.
Therefore, this year is likely to present opportunities for many active investors to invest in bouts of stock-specific volatility. Here are three industries we believe will be at the forefront of further gains for European equities.
Media
We are seeing some of our most interesting opportunities in the consumer discretionary sector. There are some exciting areas in media in particular, where we hold several cable and satellite stocks benefitting from increasing penetration and industry consolidation, as well as Southern European broadcasters.
Many companies in this cyclical grouping have been penalised by investors because of excessive concerns about the state of their domestic economies. We are seeing signs of solid growth in TV advertising trends, with scope for appreciable operating leverage as these companies have tightly reined in costs.
We are bullish on a number of companies in this space – including Liberty Global and Mediaset.
Banks
We continue to have good exposure to banks within consolidated domestic markets. As economic activity improves, we expect the good quality banks to enjoy a multi-year cycle of earnings upgrades as lending picks up, commission revenues increase and the yield curve eventually steepens.
At the same time, the very adverse environment in recent years has resulted in industry consolidation in several countries, notably in the periphery. This has enhanced the outlook for returns in the longer term.
Our top bank holdings include Intesa Sanpaolo, RBS and Bankia.
Real Estate
We are also seeing opportunities in the real estate sector – especially in Spain and France. For those companies with good quality estates, there are encouraging early signs of recovery in key urban markets, with supply remaining typically tightly constrained. At the same time, yields on these assets remain elevated, especially relative to alternative areas of investment.
We have positons in a number of attractive opportunities – such as Inmobiliaria Colonial and Gecina.
