Even though this is not a vote on whether or not we will stay in Europe, but who will run the European Parliament, the political parties are making capital of their position and how it differs from the others – as they should.
What it will do for the next few weeks is put Europe back in the headlines giving UK businesses the chance to repeat their moans about overbearing regulation and legislation, with the smaller firms having the biggest problems.
Whether or not we should formally join the EU or not is not for me to argue here, but while the headlines are political, it is a good excuse to look at the relative strength of Europe from an investor’s point of view.
Signs of recovery?
Starting with the positives: stock-picking fund managers will argue there are plenty of opportunities in the region and with recovering economies and sentiment comes increased spending, therefore more cash swilling around the best-run companies.
The top-down investors will argue the speed of the recovery is picking up, albeit from a low base, but the more encouraging signs are the growing sentiment from businesses as measured by purchasing managers’ indices. Markit’s PMI shows Ireland is at close to an eight-year high, and Spain at a record not seen for the past seven years.
Bond investors will turn their emphasis to spreads pricing in defaults of up to one-fifth of the market. If they are right then we will have bigger problems than bonds defaulting…
Stephanie Butcher, a European equities fund manager at Invesco Perpetual, says that valuation is key and, given European valuations stayed lower for longer coming out of the financial crisis, plenty of analysts see European equities as cheap.
She argues the case for any potential surprises coming on the upside and, as an income investor she cites capex could pick up, extra dividends may be paid out alongside potential share buybacks.
The downside is full of economic, political and even social issues rather than equity issues or market fluctuations.
The risks
Inflation is one significant issue and, while the ECB still has QE up its sleeve, at the moment just the threat of QE seems to be working well enough as inflation is falling.
Deflation is a bigger issue which, according to Adrian Lowcock, a senior investment manager at Hargreaves Lansdown, “sends shivers down the spines of investors as they fear Europe is sleepwalking into the same problems that led to Japan’s lost decade in the 1990s.
Unemployment, particularly in the Club Med countries is a worry with the IMF suggesting Spain’s figure will stay at around 25% unless the government takes decisive action now.
So Europe right now is a case of on the one hand there are lots of positive things to say, but on the other hand there are plenty of things to trip investors up.
Lowcock says: “The best time to invest in a region is when no-one else considers it safe to do so. For Europe, that time was in 2012 ahead of ECB President Mario Draghi’s [“Whatever it takes…”] speech.”
As does Butcher, Lowcock describes Europe as a global play as there are plenty of multinational businesses in the region that do not depend on the region for its earnings.
Europe is not as cheap as it once was – Draghi saw to that – but relative to the US and the UK it is still relatively attractively valued.
And the really good news is the number of quality European equity managers out there.
