By Dino Fuschillo, director and head of the pan-European team at Martin Currie If investors look...
By Dino Fuschillo, director and head of the pan-European team at Martin Currie
If investors looked only at Europe's macroeconomic outlook, they would be faint-hearted at best, and that is exactly what they are doing.
Hence all the doom and gloom about Germany, and its 4.1 million unemployed, being the next Japan. Hence the clear consensus about sub-trend growth in GDP across Europe.
But this is missing the point. The case for investing in Europe, whether or not the ECB cuts interest rates, is not about the big picture. It is not about sectors either. The case is simple ' it is stock specific. Right across Europe, companies are responding to a challenging, competitive world with cost-cutting and greater efficiency.
That means improved cashflow. And when you have single digit P/E ratios and valuations at the low end of their long-term range, it means there are plenty of opportunities.
Our pan-European portfolios now have a shortlist of about 40 stocks. We have taken positions in stocks, across a range of sectors, which we believe offer excellent value on a 12- to 18-month view.
In particular, we identify value in financials. We have bought insurer ZFS and banks ABN Amro and Nordea. Financial stocks fell sharply in September, but recovered strongly in October and have continued to perform well. Lagardere (new media) is another new holding of ours. We have also seen good returns from holdings such as Autogrill (food and beverage outlets) and Assa Abloy (locks), whose results have exceeded expectations.
Otherwise we have have been adding to our positions on weak days: more VNU, Vedior and Telecom Italia Mobile. Continental (tyres) is an interesting one. We own it in our mid-cap fund. It is managing to raise prices, and yet who would have thought of tyres as a commodity with pricing power?
The reasons are an oligopolistic industry and the rising cost of capital. Continental's bonds had a 7%-plus yield at the start of this year, and have fallen to 5.5%, despite the increase in overall corporate spreads.
So it is stock ideas that drive the structure of our portfolio. For several months, we have had a bias towards banks, insurance, media and support services and telecoms. We are funding this through having limited exposure to consumer staples, utilities and energy. The outlook for European markets is good in the short term. Valuations are no longer stretched by historical standards. Europe is cheap. It is trading at a P/E relative of 0.76 to the US market ' well below its 20-year average of 0.95. Some say that this valuation gap is due solely to differences in the sector mix.
But that only accounts for around one third of the gap. Differences in valuations explain two thirds, and even after adjusting for the sector mix factor, European equities are trading at an 18% P/E discount to US equities ' against a historical mean discount of 5%.
Meanwhile, interest rates look set to fall and stay low. Furthermore, results from the corporate sector have been good of late. This is causing sentiment to improve and should allow equities to make more progress.
Everybody is still gloomy.
Corporate sector will surprise on the upside.
Valuations are still low.
Europe's fortunes correlated to the US.
Weak macro economy drives sentiment.
Demands/supply for equities is distorted.
Putting the tech into protection
Square Mile’s series of informal interviews
Fallout from Haywood suspension
Launching later in 2019
£80bn funds under calculation