As a European Equity Fund Manager it is important to look past the headlines and listen to what companies are telling you: things are getting better. But where do equities go from here?
From a political perspective, uncertainties are likely to remain, especially as the French elections approach. However, in our view, the scope for radically different economic policies across the European (and even more so Euro) area is minimal: all modern developed countries have to run their economies along broadly similar lines, and debt reduction has become a global objective.
From an economic perspective, growth in Europe will likely remain low with negative growth in the first half of 2012 and low growth forecast for the years thereafter. This is nothing new, Europe has been thought of as low growth ever since I started in the industry nearly 30 years ago. European companies are conditioned for it, the major difference now however is that it is truly a global market place. European companies on aggregate generate approximately 44% of their revenues from the US, Asia and the emerging markets. These economies look likely to fare better in terms of growth which should help European exporters and should prevent a serious and long term recession in the European area.
A major factor in returning to growth will be the change in attitude towards the way governments and companies operate, and hence we seek to invest in companies that are "part of the solution". This includes outsourcing companies that can help both governments and corporates reduce costs and operate more efficiently. In our portfolios we own Sodexo, the French catering company and G4S which focuses mainly on security. On the flip side we are currently avoiding well established, debt laden, low growth areas such as utilities and telecoms. These sectors look unappealing especially as governments go in search of higher tax receipts.
The other highly important point has been the two stage Long Term Refinancing Operation (LTRO) programme, which has at the very least bought time, but may yet turn out to have been an inspired move by new European Central Bank (ECB) head Mario Draghi. Just over one trillion Euros has been made available to European banks at an interest rate of only 1%. On a fundamental basis we remain negative on the banking sector as we find it hard to believe that they can once again produce the leverage induced return-on-equity levels that they did pre crisis. That said the latest moves by Draghi at the ECB have likely eliminated a significant tail risk (a European Lehman Brothers event) and hence we have lessened our underweight position, but probably for only a short period.
Finally, and most significantly for investors, is the health of European companies and their valuation levels. Recent results have generally been good, and furthermore, dividend increases have also been announced, this is generally a good sign that companies feel comfortable with their outlooks. With bond yields at very low levels, equities look attractive, and in my opinion a far better alternative than government bonds, even more so when one realises that companies generally look a lot better managed than governments. History tells us that buying at current valuation levels has produced very attractive returns over 1, 3 and 5 year periods. Investors that have time and patience should reap rewards over the medium to long term by buying European equities today.
Tim Stevenson is Henderson Global Investors Pan European fund manager. Henderson Global Investors is represented in Israel by Meitav Investment House.
Published by Globes, Israel business news - www.globes-online.com - on March 22, 2012
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