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Top investors hunt for bargains in Europe despite deflationary threat

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Wealth managers are adding to Europe following the market correction of the last few weeks, despite concerns remaining about the threat of deflation in the region.

The renewed interest in Europe comes despite a raft of disappointing data from the continent, and follows the results of EBA stress tests on the banking sector, which saw 24 banks fail to meet capital adequacy requirements.  

European equity markets have sold off in the last few weeks, with the Eurostoxx down almost 7% over the last month. 

Stocks have partially bounced back from October’s volatility, but fears of a Japan-style deflationary spiral remain. In September, eurozone inflation was just 0.3%.

However, some fund buyers believe pessimism on the region is overblown, and the market looks attractive on a P/E ratio of 17, as at the end of September.   

Cornelian Asset Management chief investment officer Hector Kilpatrick took profits on European equities in early summer. At the end of August, he reinvested in a European tracker, and is considering adding more European exposure across his portfolios.

He said: “We think pessimism on the region has got back to fairly extreme levels. While companies with European operations are generally reporting a modest slowdown relative to expectations, they are by no means indicating anything much worse.

“With the Asset Quality Review out of the way and credit stimulus on the agenda, growth next year will be better than current depressed expectations.”

Other managers are also spotting opportunities. OakTree Wealth Management chief investment officer Ian Brady has recently bought BlackRock’s European Equity Income fund, and also holds Invesco Perpetual European Equity Income. 

He is considering topping up holdings further: “We think there is some value here as long as the authorities can avoid deflation, and we ultimately think they will do everything they can.”

At the same time, Brady is selective in his choice of funds, as he suggested buying highly-indebted or cyclical companies in Europe is a risk too far.

Meanwhile, Murdoch Asset Management director Tony Dunne has increased exposure to the Argonaut European Alpha and Henderson European Special Situations funds.

He said: “If I had a vast amount of money to put into Europe right now, would I do it? Yes. When the market is extremely pessimistic, it is the time of maximum opportunity.”

Charlotte Square investment manager James Rae said European equities now appear to be undervalued relative to those in the US, and he is boosting holdings in the region.

“Fears over the recent slump in Germany’s industrial output feel overdone, as August was an unusual month for German holidays. Overall, we are increasing our weighting in the region.”

The dividend yield on the broader European markets is roughly 4% compared to 2.7% for the MSCI World Indices, according to Fidelity’s head of pan-European equities, Paras Anand.

He said: “Europe has not always been a market that has offered substantive dividend yields.

“That reflects a fundamental improvement in the corporate sector, and the fact companies are run much more in the interest of investors today than they were historically.”

A weakened euro will provide a boost for the 65% of European corporates which derive their earnings from outside the eurozone, he added. 


Line graph showing MSCI Europe EPS vs PE ratio 30 Sep 2003-30 Sep 2014

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