The Legg Mason Investors European fund has 15% of its portfolio invested in countries that will bene...
The Legg Mason Investors European fund has 15% of its portfolio invested in countries that will benefit from European Union convergence. Manager Kieran Gallagher said these areas present exciting opportunities amid otherwise lacklustre performance from the continent.
Currently, 10% of the fund managed by Gallagher, is invested in companies from countries to be included in the first wave of EU accession in May, 2004, such as Poland, Hungary and the Czech Republic.
A further 5% of the portfolio is invested in companies in applicant countries such as Croatia, Bulgaria, Romania and Turkey. These are likely to enter the EU some time between 2008 and 2010, he said.
'As a whole, Europe has issues in regard to its top line revenue and earnings growth. These issues include the strength of the euro and weakness of the global economy. There is also a reluctance to undertake structural reform in some of the core European economies and insufficient monetary easing to compensate for the dollar weakness,' he said.
Delving deeper, Gallagher said it is really a case of two Europes. Older partners of the EU, such as Germany and Italy, are struggling with GDP growth of around 1% per year, while there are exciting growth opportunities outside the founding members of the EU.
'If we take it one step further and look at the ascension countries that are going to be joining the EU, we are seeing growth averaging around 3%pa. Poland is 2.5%, Czech Republic is 3.3% and Hungary is 3.5%,' he said.
'Among companies that have applied join the EU further down the track, we are looking at growth of around 4%-4.5%. Croatia is 4.3%, Bulgaria 4.0%, Romania 4.5% and Turkey 4.5%.'
He said Turkey is particularly interesting, with attractive valuations as the market is trading at 10.5 times 2003 earnings. 'This is an economy with 55 million people. It has a new government and the economy has tremendous potential,' he added.
Improving portfolio diversification
Hanging on the telephone
German recession concerns