The peripheral economies of Europe are offering attractive valuations and significant upside pot...
The peripheral economies of Europe are offering attractive valuations and significant upside potential, according to Artemis European Growth manager Philip Wolstencroft.
Wolstencroft has taken a 10% position in Hungary and the Czech Republic since his fund's launch two years ago. Wolstencroft says the debate over whether the European Central Bank should have cut interest rates by more than 25 basis points to help Germany out of locked-in low growth has little relevance to the direction of markets.
He says: 'If countries like Germany and Italy want to regain their momentum it is not rate cuts that will turn them around, but how they restructure their economies. Politicians will eventually be forced to recognise this.
'The powerhouse of today's Europe are the peripheral countries, like Ireland and Spain and Scandinavia, and some countries of Eastern Europe.
'Their economies are going in the right direction with lower labour costs and generally more flexible labour markets.'
Frederik de Merode, senior portfolio strategist at Fidelity, notes that prior to the recent rate cut the Euribor bank rate futures figure was trading at just below 2.5%.
He says: 'This led to an expectation of a cut of more than 25 basis points to 2.5%. There was hope they might go for 50 and both the bond and equity markets were a bit disappointed at 25.'
De Merode says some highly leveraged European tech, media telecom stocks may benefit from the monetary easing as firms will pay less interest on their enormous debts.
Wolstencroft adds that the cut reinforces the bull case for cyclical stocks such as construction companies in Spain and banks in Ireland. Ireland recorded 8% GDP growth last year, compared to Germany's nominal 0.2%, he observes. The contrast, he says, helps illustrate why his fund 'tends to have cyclical exposure in the peripheral parts of Europe and defensive exposure in Germany, Switzerland and France'. Wolstencroft's central European position comprises a Czech bank, a Hungarian bank and a Hungarian oil company.
'Valuations are low in this part of the world, growth is faster and there is a big chance these stocks will outperform the rest of Europe by a big margin,' says Wolstencroft.
Though Germany is generally out of favour, the Artemis fund's position at 14.7% is still 1.3% overweight on the MSCI Europe ex UK measure. Wolstencroft puts this down to investments in international German companies. The Fidelity European Fund, managed by Tim McCarron, is 5% underweight Germany.
Both funds have been heavily underweight Switzerland, which had a MSCI weighting of 18.7%, while the Artemis and Fidelity allocations are just 4.1% and 9.6% respectively.
De Merode adds that fund managers continue to track the difficulties of Euroland exporters to the US, caused by the appreciating euro. On March 10, the dollar was near to an all-time low against the euro, at e0.9059.
But de Merode believes some experts have prematurely concluded America has abandoned its strong dollar policy.
It is too early, he says, to conclude the US will not act to stop the dollar falling much lower, thereby assisting the competitiveness of Euroland exporters to America.
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