Not so long ago the eurozone crisis was headline news, today things have calmed down somewhat but the same fears remain. Still, one year on from ECB president Mario Draghi’s famous ‘whatever it takes’ speech, and his proclamation has yet to be put to the test.
Ever eager to sniff out a contrarian opportunity, European equity fund flows have picked up in the past 12 months (though latest IMA figures show new retail outflows in June, the first since August 2012).
Olly Russ, manager of Argonaut’s European Income Strategy, says Europe is as cheap as ever on a valuation basis against the US market.
He says: “Europe is always on a discount, but it’s at a big gap presently. The question is can Europe catch up economically? If you look at non-core PMI numbers, it’s clear that France, Spain and Italy have all picked up this year, and who would have thought that would happen?”
On the periphery
Russ remains wary of peripheral Europe, preferring instead to invest in companies based in the north of the continent. Having recently sold Nestlé amid concerns of a slowdown in emerging markets, he has been adding to life insurers and consumer discretionary names such as Adidas. He has also invested in to UBS on the promise of decent dividends.
Rob Burnett, manager of Neptune European Opportunities, has taken on cyclical risk at the expense of high quality defensive growth stocks, where he believes valuations do not reflect the current economic environment. He is also overweight banks.
He adds: “Although consumer confidence has been at historically low levels, we have recently seen a sharp improvement in the data, which bodes well for European consumption in general. Specifically, we believe this improvement will provide significant support to the automobile sector.
“For example, Spanish car demand has returned to 1985 levels and demand in Italy is at early 1970s levels. With improving consumer confidence, we anticipate European car volumes to start recovering in the second half of this year and rebound sharply in 2014.”
PIIGS might fly
Few are talking up the so-called PIIGS, though John Baker and Jon Ingram, fund managers at JP Morgan Asset Management, do see exciting opportunities emerging, in part because of the “phenomenal” job some countries have done to restructure from a competitive perspective.
“In Ireland wage costs have come down by 25% since before the financial crisis, so unit labour costs are now at a level that makes it attractive for companies such as Amazon to base themselves there,” they say.
“Some of the biggest car manufacturers have moved into peripheral EU countries as wage costs have become more competitive with non-EU locations, and countries such as Portugal are seeing strong benefits from this.”
Hosting such a diverse array of cultures and economies, it is always dangerous to generalise about the prospects for Europe as one investment entity. However, with a Chinese slowdown, US tapering and Japanese Abenomics dominating the agenda this year, suddenly discussion on Europe is on the backburner. A quiet European recovery might be just what the doctor ordered.
Baker and Ingram’s article on the prospects for peripheral Europe features in the August issue of Portfolio Adviser, out now.
