At these levels, European equities look closer to fair value, neither cheap nor expensive. That is why now is really the ‘show me’ time for the market. We’ll need to see earnings growth materialize in order to move sustainably higher.
Having mirrored US corporate earnings for decades, during the last five years European earnings have significantly lagged as US growth has powered ahead. However, that has now started to change, which bodes well for the market outlook. In fact, we’ve recently seen more positive upwards revisions to aggregate European corporate earnings estimates for the first time since the summer of 2011.
Promisingly, macro-economic headwinds are turning into tailwinds and there is a litany of positive catalysts:
- The collapse in the oil price that helps lower input costs for European companies and increase disposable real incomes for consumers, acting as a significant boost
- The significant decline in the Euro bolsters European corporate competiveness
- A spate of strong Eurozone economic data continues to exceed expectations, leading analysts and policymakers to upgrade their estimates for GDP growth
- Deflation fears have troughed and Eurozone inflation expectations are recovering (from a low base)
- Credit is expanding and flowing more freely — not only are banks making it easier to access bank lending, but demand for loans from both households and businesses is on the rise
- Consumer confidence is rebounding and sentiment is improving
These tailwinds are being felt by European corporates. From a pan-European earnings picture of no growth at all for the last 5 consecutive years, we are now seeing estimates for 5% earnings growth. And that headline number actually masks powerful underlying growth at the sector and country level.
As we look for corporate earnings to finally deliver on the improving business landscape, a selective approach to finding the best investment opportunities is critical. The unconstrained ability to seek out attractively valued, high quality stocks with positive momentum can help to uncover hidden gems. Some examples of current investment ideas include the following:
- Pandora: the company is a great example of identifying positive momentum in under recognised growth opportunities. Following a bumpy period immediately post IPO five years ago, the jewelry company dropped nearly 85%. We considered the extreme valuations alongside signals of strong cash flow, improving quality and rebounding momentum, buying into the stock more than 3 years ago. A continuous pattern of improving earnings has led to a more than 20 fold increase in the share price since its market low in late 2011.
- ISS: is an example of our overweight in support services. It was recently trading at an unwarranted 20% discount to peers, which we expect to narrow as they continue to deliver on promises and build a strong track record. The stock couples a stable yield with attractive underlying earnings growth.
- Adecco: this Swiss recruitment company has delivered encouraging sets of results which have beated on margins, while a clear pick up in exit rates provides a positive outlook. As the macroeconomic recovery continues we expect this to feed through into more buoyant labour market conditions, while operating leverage boosts potential for the company’s earnings upgrades and multiple expansion.
- Aareal Bank: this German specialist property financing company has consistently exceeded analyst earnings expectations. The company should continue to benefit from the economic recovery seen in large parts of Europe and the quantitative easing by the ECB should drive property markets in 2015.
In our view, finding the best opportunities in the continental European market irrespective of benchmark weighting and maintaining a high level of exposure to attractive value, high quality and positive momentum characteristics can lead to the sustained generation of alpha.
To learn how the JPM Europe Dynamic (ex-UK) Fund can provide your clients with unconstrained exposure to the European recovery, visit jpmorgan.am/jpm-eud
For Professional Clients only – not for Retail use or distribution. Source: J.P. Morgan Asset Management as at 31 May 2015. The Fund is an actively managed portfolio; holdings, sector weights, allocations and leverage, as applicable are subject to change at the discretion of the Investment Manager without notice. The companies/securities above are shown for illustrative purposes only. Their inclusion should not be interpreted as a recommendation to buy or sell. J.P. Morgan Asset Management may or may not hold positions on behalf of its clients in any or all of the aforementioned securities. Issued by JPMorgan Asset Management Marketing Limited which is authorised and regulated in the UK by the Financial Conduct Authority. Registered in England No: 288553. Registered address: 25 Bank St, Canary Wharf, London E14 5JP.
