The poor outlook for continental economies should not blind investors to the far more impressive ret...
The poor outlook for continental economies should not blind investors to the far more impressive returns available from European equities.
Barry Norris, manager of the Britannic Argonaut European Fund, told delegates his investment universe is full of corporate success stories and with the equity market now the cheapest within the developed world, there are plenty of opportunities to lock in to positive returns.
"Europe's problems are well known," said Norris. "Economic growth, at least in it is geographic core, is anaemic: demographics are unfavourable, at least until Turkey has been admitted into the European Union; the European Central Bank has been unwilling to micro-manage internal demand; the rising euro has tempered demand for exports; supply-side reform has to date been modest; politicians have been lacking urgency in addressing the continent's problems.
"Despite this, Europe has outperformed every other major equity market over the last two years. You do not have to be an admirer of Europe, either politically or economically, to recognise the opportunities in European equities to make money. Just conceivably we are two years into one of the most unlikely bull markets in history."
Norris thinks there are two aspects of the European market that are compelling: cheap valuations and higher oil price.
"Dividend income is one of the most attractive characteristics of the European market," said Norris. "Some 42% of companies in the European universe yield more than German 10-year government bonds. Historically, 10-year government bonds have yielded two-and-a-half times more than equities; today there is yield parity at a little over 3%. Historically when equities and bonds have parity, it has been a great time to buy equities."
Corporate Europe is also flush with cash, with the corporate free cash-flow yield more than twice covering dividend payouts, according to Argonaut. European equities are cheap against other asset classes, emphasised Norris with cash yielding 2%, against 3% for government paper, 4% for corporates and a 7% equity free-cashflow yield.
He is also convinced that the market is only at the beginning of the boom in oil and oil-related stocks.
Norris added: "The oil price is high because spare production capacity is tight to an almost unprecedented degree. This year, global demand for oil will be on average 84 million barrels per day, but there is only 1.5 million barrels of spare capacity: less than 2% of the total market. In the mid-1980s there were 17 million barrels of spare capacity but demand was only 60 million, so spare capacity was 30%.
"Neither oil companies nor Opec have invested sufficiently in production and exploration. This is why oil is now the bottleneck to global economic growth." Current oil production is over-reliant on huge, mature oil fields, which are past peak production, according to Norris. Half of the total amount of oil comes from 120 giant oil fields. Half are more than 40-years old while 95% are over 25-years old, he said. He added: "The 1960s saw the peak of oil discoveries and since then they have dropped off significantly.
"Saudi Arabia is the key player in oil production and analysts in the oil industry consistently overestimate the ability of the Saudis to keep finding more oil. But this optimism is not warranted, as Saudi oil production and capacity are suffering exactly the same pressures as the rest of the world's suppliers.
Argonaut believes oil companies and Opec are going to have to increase spending on oil production and exploration, with a positive knock-on effect for European companies.
"This means the most exciting part of the oil industry is oil services companies: companies that collect seismic companies, companies that rent out oil rigs or involved in construction work on oil projects will benefit significantly. These companies should see 20%-30% revenue growth in the next three or four years and in a market in which top-line growth is scarce, this is a compelling attraction," said Norris. He added many of these businesses, such as TGS Opec and OMV, are based in Europe.
Big economic problems face Europe but the outlook for stocks is very positive.
European equities now the most cheaply valued in the entire developed world.
42% of European companies yield more than German 10-year bonds.
European companies are now flush with cash.
High oil price will benefit companies focused on production and exploration.
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