Consensus realism paves way to

More realistic consensus expectations on European companies’ earnings this year than last are paving the way for potential upside, says Allianz Global Investors’ Marcus Morris-Eyton.

Consensus realism paves way to


With the European Central Bank’s quantitative easing policy coming into effect on 9 March, investor sentiment on continental equities markets is on an upwards curve.

As a self-described pure stock-picker, Morris-Eyton, manager of Allianz’s Europe Equity Growth Fund, tends to ignore “macro noise” – but even he cannot ignore the potential benefits of widespread European positivity.

“Valuations in Europe are generally fair,” he said. “But if you compare them to other markets, that is when they start to look attractive. The advantage that Europe has is that it is two years behind the US in terms of recovery. Whereas the US is trading at close to peak earnings and margins, in Europe we have not seen any earnings growth for four years.

“Consensus is only looking for 5% earnings growth for 2015, whereas a year ago it was looking for double-digit factors. The double-digits definitely steered Europe in the right direction for the past 12 months, yet we have now got consensus at far more realistic level, leaving space for potential upside.

He continued: “We are seeing the early stages of a European cyclical upswing – the purchasing managers index, business sentiment and raised forecasts for GDP growth are all positive indicators. Also, there should be a very nice FX tailwind for European companies which will equate to high single-digit earnings in 2015.

“There is also room for significant market expansion potential if we see top-line growth. A lot of companies are not operating at full capacity utilisation, so the incremental increase in cost [stemming from low energy prices] to expand their output will not be that high.”

Despite his strict stock-picking outlook, Morris-Eyton is heavily-weighted to the information technology, industrial and healthcare sectors, with 85% of his holdings in those markets.

“[Those sectors] are where you find companies that can differentiate themselves from their peers,” he said.

“As a stock-picker, we look at sectors where there is high growth dispersion between the best and worst companies. On the other hand, telecoms and utilities are very homogeneous sectors which are heavily regulated in terms of profitability and usually supplying very similar products, and we do not own anything in those sectors.”

Morris-Eyton also holds 30% exposure to companies with US revenue streams.

“The biggest risk [to the portfolio] is a slow-down in the US, which would have a big impact on the underlying corporates that we are invested in,” he explained. “But I do not anticipate a US equity sell-off.”


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