Investing in Europe part 1: the truth behind the headlines
For months, reports on Europe have focused on Greece’s potential eurozone exit and the ongoing collapse of the euro against the dollar and pound. More recently there have been concerns over the impact China’s economic troubles could have on the continent.
But could high quality stocks and value investment prospects lurk behind these negative headlines? In the first instalment of a two part special, YourMoney.com asks five investment experts for their view.
According to some, the ongoing problems in Europe – whether country- or region-specific – are short-term noise, which investors should disregard.
Laurent Millet, co-manager of the Artemis European Opportunities fund, believes the Greek crisis is a sideshow.
“Greece is a tiny economy – around 1 per cent of the eurozone’s GDP – and the European Central Bank’s commitment to quantitative easing is an open-ended backstop,” he says.
“Even if Greece left the euro, or the European Union altogether, we are not concerned about contagion.”
Stephen Mitchell, lead manager of the Jupiter Global Managed fund, believes investors must adopt a long-term view.
“Don’t lose sight of the fact that this is a protracted recovery – perhaps the most gradual we’ve seen, in fact,” he says.
“The wider picture points to growth – modest, but slowly picking up.”
Rather than ignoring headlines and transitory panics, Nick Davis, lead manager of the Polar Capital European Income fund, believes investors should pay close attention as they can create buying opportunities.
“We try to buy companies that are likely to be stronger in five years’ time, but are also cheap today. This cheapness is often the result of short-term noise,” he explains.
“The market can be extremely short-term – and this provides opportunities for longer-term investors to buy good companies at good valuations.”
Micro vs. Macro
Despite this, experts are split on what investors should focus on – countries as a whole or specific stocks.
Davis concentrates on what individual companies are saying and doing, rather than “trying to second-guess the next (Mario) Draghi (president of the European Central Bank) statement”.
“Investors should focus on the basics – ‘what does a company do, how much cash does it generate, and what does it do with that cash?’” he says.
“A solid, cash-generative stock deploying that cash in attractive areas, can deliver decent performance – even if the broader macro environment is tough. Investors should be looking to be a bit contrary in the current macro noise – a top-down approach is likely to be inconsistent.”
Mitchell also favours a micro view, stating that despite ongoing economic issues, his fund “[has] no problems sourcing good stocks in Europe”.
“It’s a high quality universe of global businesses – GDP is not always a good guide to returns,” he explains.
Nevertheless, Mitchell believes key macro indicators – wage growth, export ratios, and whether European consumers are buying big ticket items, like houses and cars – are worthy of investor attention.
“Companies with more money coming in than going out support national economic growth and underpin wider European performance,” he concludes.
Chris Price, investment specialist at Redmayne-Bentley, takes a balanced view. He notes stock markets tend to not track economic performance, but are sensitive to the direction of economic change, shifting market sentiment and valuations.
“The European economy had been seen as moribund compared to the actions taken by the US and UK authorities to stimulate their economies – the ECB’s own quantitative easing programme has yielded positive results thus far, and has helped European market performance,” he says.
“The majority of [eurozone] countries can be considered safe from an investment perspective, but if considering holding direct equities, any political and country risks also need to be evaluated.”
Julian Chillingworth, chief investment officer at Rathbones, takes a more macroeconomic view, believing the continent’s economic fortunes will be determined by which of two wider forces prevails – a weaker euro, or the Chinese economy.
“Medium-term, a weaker euro is good for German exporters as it makes their labour costs low and boosts the real value of goods sold overseas – but Chinese GDP growth is slowing, which means fewer exports to one of Germany’s largest trading partners,” he explains.
The outlook for Europe
After several years of no growth, and a failure to mirror the stimulus measures employed by the US and UK, the European outlook appears to be improving.
“In many cases, company debts are at historic low points – and earnings are rising,” says Millet.
Price believes European equity markets offer dividend yields that are attractive compared to bonds, and other developed nation markets.
“The dividend pool in Europe is greater than in the UK and a large number of companies within Europe have increased their dividends over time,” he says.
However, some uncertainty remains and other markets and regions may represent a superior investment prospect.
“The outlook for Europe isn’t as good as for the US,” says Mitchell.
“Much of this is demographic. Europe suffers to a large extent from an ageing population, high levels of unemployment and low wage growth. Government debts have pulled back from their crisis peak, but significant burdens remain.”
Price believes currency risk remains an issue, as the weakness of the euro to sterling over the year so far has meant inferior returns for UK investors. There is little indication the euro will recover in the near future.
Furthermore, the full extent of China’s economic woes are yet to be revealed. If growth continues to falter, or the economy slides into outright recession, the impact on Germany – and Europe as a whole – could be catastrophic.
“Germany is the locomotive of the eurozone, driving growth to between 1 per cent and 1.5 per cent this year – that’s why the global equity sell-off triggered by China had a heavy impact,” explains Chillingworth.
Nonetheless, he believes if worries about the Chinese economy are exaggerated, falsely low valuations of European stocks may result – meaning buying opportunities could be created.
Davis, however, again stresses the stock-specific view.
“We expect an earnings recovery in Europe and continue to expect an environment where good, resilient businesses can continue to deliver good results despite ongoing uncertainty,” he says.
For stocks, funds and markets to watch in Europe, see part two of this special.