Since the global recession first started making headlines in 2008, we have seen a stark contrast in the performance between US equities and European equities. US equities have rebounded strongly and have become the consensus overweight call when it comes to allocating to developed markets. Leading companies like Apple have grabbed the headlines, while Nokia has slipped to virtual oblivion. However, as is so often the case, we believe the love affair with the USA has gone far enough, while the fear and loathing of Europe has led to many great European companies being neglected the proverbial baby being thrown out with the bath water.
From an economic standpoint, the US is clearly in better shape currently with forecast GDP growth of 2.3% in 2012, while Europe is forecast to decline marginally (Bloomberg consensus). The US benefits from a more open labor market (it is simpler to lay people off and to hire new staff), and from a very loose monetary policy. Furthermore, issues such as massive government debt are not being addressed immediately and are being postponed for another generation to worry about. Banks have been recapitalised, and the economy looks to be in far better shape.
Meantime, in Europe, the economic landscape is dominated by debt ridden banks and governments, high youth unemployment and policy inaction caused by national political agendas. However, there are signs that key problems are beginning to be addressed. . The ECB have proven that they are willing to take extraordinary measures to stabilise sovereign and bank markets through their LTRO I and II programmes (do not be surprised to see a third round of LTRO if things deteriorate again). This has bought some three years of time - which needs to be used wisely by banks.
The market has also become concerned about a heavy electoral calendar and the prospect of a socialist government in France. Politics in Europe is either highly significant, or an irritating distraction: on the one hand, intense disillusionment with the inability of previous governments to come up with decisive action to improve the situation has led to increased popularity in “radical” - left or right - factions; on the other, there is little alternative within a modern economy to do anything too different from global (not just European) developed economies. So in fact the imminent change in government in France may be a good thing, especially if the debate in Europe moves on from “austerity” to “growth,” while acknowledging the need to get debt down in the medium term. One of the tools that Europe could use in this respect is a weaker Euro, which would further aid Europe’s already strong exporters (Europe exports more to emerging markets than the US).
There have also started to be measures taken to improve some of the labor laws which have achieved the opposite of what their creators wanted they have destroyed jobs not saved them. Labor flexibility is an imperative in a global market - otherwise all jobs will flow to the US and Asia. European attempts to improve structural issues - whether they are too high government debt or inflexible labor, are now being slowly addressed.
Europe also stands to benefit from the success of the US economy. US and European PMIs (a measure of economic activity) have usually moved in tandem. It is our view, that the two regions remain economically linked, and as Europe gradually addresses its issues we should see these converge once again. There is evidence that European macroeconomic indicators have stopped deteriorating, and may see an improvement in the second half.
So although the top down currently favors the US, Europe is not the economic wasteland that some would have you believe. When you look at the micro economic picture (we spend the majority of our time looking at companies as we believe it is the ultimate driver of long term returns) things are far more evenly balanced, with the astute stock picker finding each market fruitful for investor returns. In fact. the latest corporate results have reinforced my view that there is great strength and leadership from many global companies based in Europe.
This list includes the likes of SAP, BMW, Burberry, Luxottica and Elekta. SAP is now perceived by many to have a far better line up of software for company management than its US rival Oracle. BMW is one of the most successful car and motorcycle manufacturers in the world. With BMW, MINI and Rolls-Royce, the BMW Group owns three of the strongest premium brands in the automobile industry. Equally Burberry is one of the best recognised luxury brands with strong profitability and impressive growth from Asia. Europe also includes leaders in the healthcare sector: Elekta has proven itself to be at the forefront of science and technology, delivering clinical advances for the treatment of cancer patients.
This all argues for two crucial features which we constantly stress to clients looking at the European markets: patience and selectivity. The first is because investment in change takes time. The second is because those companies that fail to change will lag far behind.
Tim Stevenson is Henderson Global Investors Pan European fund manager. Henderson Global Investors is represented in Israel by Meitav Investment House.
Published by Globes [online], Israel business news - www.globes-online.com - on May 17, 2012
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