As investors flock back to Europe en masse, Rebecca Jones asks three managers if European companies have become a little too expensive.
Andy Tuck, head of funds, Walker Crips
To a coin a phrase, the horse has already bolted. The contrarian play in European equities was probably summer 2012 – that was the time to pick up value in core-Europe. But, that’s not to say that there isn’t still value out there – you just have to be a bit more selective about where you look.
There are certain arbitrage plays in various sectors if you’re looking for value. In the motoring sector Daimler AG, which has recently undergone massive restructuring internally and is targeting Asia, currently stands on about a 10% discount in price to earnings (PE) terms.
If you strip out about four stocks, the Euro Stoxx 50 index is probably on an average PE of about 16, which I would say offers fair value generally. However, there are areas of the market for the brave, for example Greek and Italian equities.
Is there value left in European equities?
It is investing for the brave; we do know that these are recovery areas of the market but if you want to unlock good returns for your investors in the next few years you do need to be concentrating on contrarian plays in these types of markets.
Looking at the macro we do now seem to be entering a period where we’ve got tail winds as opposed to headwinds. There are still issues in Europe, but there are signs of light; we’ve just seen a quarter of positive GDP growth in Spain and there are areas of Europe like Germany that are doing quite well.
The difference between now and 2008/2009 is that we’ve gone a long way down the line in starting to address the financing of the banks. The European Central Bank’s reassurance that it will support European economies by whatever means necessary has also given investors new confidence in the region.
Jacob de Tush-Lec, partner and senior fund manager, Artemis
European valuations on average are not ridiculously high but they’re not as cheap as they were two years ago.
Domestic facing businesses have become particularly expensive as over the last 18 months investors have switched from buying European exporters to domestic simply because they were the really cheap, beaten-up ones.
However, despite this big rotation to domestic facing businesses, Europe is still not in great shape. I recently sold TNT express, a European domestic business-to-business parcel delivery service as it had become averagely priced despite there being no improvements to trading conditions.
You can make a case for buying an expensive or averagely priced stock if you believe the multiple will expand, revenue will go up and there will be a recovery story. However, you’re not getting that on 12 times earnings at the moment. On top of that, Europe is no longer controversial, it’s consensus.
Although, people are still not in love with Europe; many British and most American funds are still underweight in the region. I’m overweight as you can find cheap stocks, but you really have to be selective in your stock picking.
It really boils down to what you think about the macro. If you think that we’re out of the woods and Europe will be OK, you can buy things like banks which are an easy way to play it. I would also buy domestic defensives instead of domestic cyclicals, which most people are focusing on.
Before, you could have closed your eyes, picked a European stock and it probably would have been cheap. Now it’s tougher, but Europe is not all done; the probability of making money in Europe has gone down 75%, but that is just regular stock picking levels.
Stephen Cohen, head of investment strategy, iShares EMEA
Clearly we’ve had a rerating of European equities over the past 12 months; we’re not at the extreme levels of cheapness we were last summer and the beginning of this year. Europe is back towards its more long-term average.
However, when we think about where we see opportunities in equities Europe is still up-there. While the region has seen a re-rating, when you compare European valuations to the MSCI World or the S&P 500, they’re still toward the lower end on a ratio basis.
One of the big challenges Europe has faced up until the first quarter of this year was the issue of contagion risk. Every time there was an event in Greece or Portugal or Spain you saw a fall in other markets, particularly in government bonds.
What’s really interesting is this year, if you look at the performance of European government bonds when we had issues around the Italian and Portuguese governments the impact was far more isolated.
I think this is where Mario Draghi and the European Central Bank have had such a big impact. The concept of a much more pro-active central bank has removed a lot of the contagion risk that was such a plague on European growth and equity performance.
That’s not to say there are no challenges in Europe, but Draghi and the ECB have been big factors in the recent outperformance of European equities and the region’s ability to benefit from the better global growth environment.
In terms of where to find value, financials are still not a bad place to be, but things have become a little more stock specific as we’re coming up to the bank stress tests next year. Generally, we tend to look more broadly at the Euro Stoxx 600.
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