Europe plc is performing well, with good corporate news- flow, an upturn in M&A and continuing stron...
Europe plc is performing well, with good corporate news- flow, an upturn in M&A and continuing strong demand of goods from Asian countries, especially China.
Combined with a fairly aggressive programme of share buybacks and dividend issuance, the region continues to be a source of investment opportunities for fund managers.
According to Michael Bartek, investment manager at New Star, the European market just keeps on going up. Cyclical companies in the commodity and capital goods area are restructuring and have switched to producing goods to the low cost bases of Eastern Europe and Asia. There has also been increased demand from the China manufacturing industry for commodity type products and so commodities companies have been improving profitability and are now cash rich.
Commenting on the positive markets in Europe Richard Wilson, head of European Equities at F&C Asset Management, says: "News flow on the corporate side continues to be encouraging. A pick-up in M&A activity across Europe, share buyback programmes and higher dividends are all positive for equity markets. Additionally, valuations are attractive compared to government bonds and the rest of the developed equity regions. However, further strengthening of oil prices and a sharp decline in economic activity could be of concern for investors. Currently, we hold overweight positions in pharmaceuticals as their valuations have yet to price in some expected positive news flow."
Bartek warns as the global economy has been slowing over the past couple months the profitability of cyclical companies have also slowed. It is unlikely these companies can improve their current profitability levels due to a global slowdown. Cyclicals will struggle as companies have done all they can to restructure and news flow could be negative in the next year.
New Star has switched favourability towards defensive type companies. For example, Bartek feels the healthcare sector has been attractive of late because of an aging population and the new pharmaceutical products that address their medical needs. He likes Swiss-based company Roche as it has developed a drug that has been beneficial for cancer treatments.
Standard Life is more bearish on the pharmaceutical industry. Stuart Farser, investment director of European Equities at Standard Life, warns against the healthcare industry.
He says: "Irish pharmaceutical company Elan has recently been forced to pull multiple sclerosis drug Tysabri after it caused numerous fatalities. The share price of this company dropped 80% in one day. The healthcare industry is very much susceptible to the performance of drugs and news flows."
Farser's approach is to focus on stocks rather than sectoral trends. It is more difficult to guess what is happening in the economy when indicators show that it is giving mixed signals. It is better to find out from companies themselves.
Presently, he is looking at companies that focus on making sure investments will help its performance to give better returns and add value. For example, French-based Perno-Ricard is presently bidding for UK drinks company Allied Domecq. This will add value to its shareholders as the company will be able to utilise Allied Domecq distribution network.
In the oil sector Austrian-based company OMD has recently bought a state owned Romanian company, and the value of this merger has not been picked up by the market. Farser thinks the restructuring will increase efficiencies and profitability for the group.
European equity markets are boosted by share buy-backs and dividend issuance.
Manufacturers continue to benefit from outsourcing to low-cost areas such as Eastern Europe and Asia.
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