Why are European equities such a gamble? Unless you’ve been stuck in a stable for the past year you can’t have failed to notice the rough ride in the markets – in just over two months from 1 July last year to mid-September, the DJ Euro Stoxx 50 fell by 34%, and the recovery since then has been nominal.
Straight from the horse’s mouth
Still now could be time to get back in the saddle, especially as the horse may have already bolted in terms of the worst of the eurozone sovereign debt crisis. Even Mario Draghi, president of the ECB no less, has said as much, adding that the situation is stabilising.
Some savvy investors have already bought back in while valuations are low, though few have gone straight in with a large position.
“We have put our toe back into Europe, because it seems things could potentially be working out not nearly as bad as the doomsayers have been saying for the past year,” says Stephen Hunter, director, private clients & charities, at Cornelian Asset Managers.
“The markets have performed atrociously but global growth could support a lot of the companies in Europe which are trading more cheaply than they probably ought to.”
Investors looking across the continent are not just hoping for a rebound in growth; it is easy to forget that Europe is home to some outstanding multinational players, many of which are defensive in nature.
The managers of the Barclays Capital Radar Fund have recently increased the portfolio’s weighting to what they term as European ‘aristocrat’ stocks which they say can deliver high and rising dividends.
Senior portfolio manager, Jason Smith, actually believes the upside potential of European equities in 2012 is modest overall. However, that has not dented his preference for a selection of large-cap blue chips that have been able to increase dividends over the past 10 years, despite the crises.
“In January we had 20 European stocks that are defensive in nature and with a low beta relative to the market and they also bring income into the fund,” he says, adding that the team has focused specifically on the oil and drink sectors.
“We are building on the theme that these stocks are defensive and high yielding, with the yield on European dividend aristocrats currently 4%,” he adds.
Hold your horses!
A more sober view comes from Tim Stevenson, director of European equities at Henderson Global Investors. He points to a “very healthy” correction taking place at present in markets overall, though his optimism for Europe is more for the medium than short term.
He says: “We’re entering the dividend-paying season in Europe and this is generally supportive of markets. The other factor on which we need to keep an eye is the political situation. The first round of elections starts in France at the end of this month and clearly, that brings uncertainty.”
However, he also points to high youth unemployment in Spain and a number of other countries, which could take years to remedy. Overall though, he believes we will see better economic data coming out of the European markets in the second half of this year.
