European equities are on a roll as emerging market economies falter. While there may be setbacks along the way, managers tell Paul Burgin where they expect to see further gains.
The IMA Europe ex UK sector rose almost 30% in the year to the end of August as investors re-evaluated their stance on the continent’s beleaguered economies.
The sector has pulled ahead of its UK All Companies, Global and Global Emerging Markets counterparts as Asian and emerging market sentiment has dipped.
European special situations, recovery and value strategies have done particularly well as out-of-favour sectors, such as automobiles and financials, have benefited most from the improved outlook.
Where next for the European rally?
Although managers think more gains are to be had, they caution that selectivity is vital. Volatility and corrections will interrupt the pace of further rises in European stock values.
John Bennett, head of European equities at Henderson, does not mince his words. He has been urging investors back into European equities for a while, confident that cash-generative Europe-listed firms at low valuations will provide solid returns for investors as confidence picks up. But he also warns about beta investment strategies as a correction looms in the short term.
“It is most important to distinguish between two different time horizons. Long term, I am convinced that this will be the decade of European equities outperforming American and emerging market equities. However, while valuations were mouth-wateringly tempting in June 2012 when the macro picture looked hellish, they have risen sharply since then.
"I am quite conscious that valuations are very different from where they were last year. We are building up to a bit of a sell-off,” he says.
Jonathan Ingram, co-manager of the JPMorgan Europe Dynamic ex UK fund, is also optimistic. The next five years could deliver impressive gains although the course and pace is hard to predict.
“Overall, we are positive on European markets. They have rallied over 100% since 2009. Current valuation levels have, historically, indicated 10% annualised returns over the next five years. That is very attractive against any other asset class,” says Ingram.
Yet he too is less certain about how smooth that annualised 10% return could be.
“It depends on how quickly people reallocate to Europe. Syria, the German elections and other uncertainties may make investors hold off. But if you wait too long, you will have missed the rewards,” he says.
His fund is currently tilted towards cyclicals with strong fundamentals. He likes automakers, such as Volkswagen and BMW, which remain cheap on valuations of 9x earnings. But he is not convinced the whole sector is in good shape. The likes of Peugeot and Fiat continue to struggle in sluggish home markets.
Many Europe ex UK funds have boosted returns by betting heavily on the continent’s banking sector. Mario Draghi’s “whatever it takes” speech caused shares in even the weakest of banks to rise. Ingram has taken a more cautious approach to financials.
This article continues…
Cautious, Balanced & Dynamic Growth
Cowardly, boring or sensible
Latest news and analysis
‘Most significant’ upgrade since launch
Changes happening over coming months