While many investors underestimate the potential of pan-European equities, recent volatility has pro...
While many investors underestimate the potential of pan-European equities, recent volatility has provided buying opportunities for fund managers with an eye for the longer term.
Europe's economies and stock markets have performed surprisingly well lately, rebounding after a period of sluggish growth. Economies have benefited from relatively low interest rates and a reasonably strong euro, as well as continuing consumption growth, improved employment prospects, and robust external demand.
In common with other markets, pan-European equities experienced a pull-back more recently, due to concerns about global growth. However, against the backdrop of sound European economic growth, solid company earnings, and reasonable equity valuations, we view volatility as an opportunity to buy quality stocks at inexpensive prices.
Of course, Europe offers the obvious attractions of major multinationals with global brands, but it also benefits from a number of unfolding medium to long term stories. One of these is Germany. From the evidence gathered in our many meetings with companies including banks and manufacturers, we believe Europe's former economic powerhouse is recovering strongly after a lacklustre period, and that with its new breed of managers, Germany will be the next big story in the region. Over the last six months the country's equity market has performed well, thanks to the improving domestic economic situation as well as the continuing stability of the global economy.
Furthermore, following years of onerous regulation in much of continental Europe, an ongoing drive towards more flexible labour laws and tax regimes is set to provide a more dynamic edge to the European business environment and stimulate equity markets going forward.
In the longer term, emerging European countries such as Hungary, the Czech Republic, and Bulgaria will provide the demand and the resources to boost European economic growth. Unfortunately, many emerging European markets are not cheap, but opportunities to leverage these economies' potential for growth can be found elsewhere at inexpensive valuations. Established companies with skilled management, such as Greek mobile operator Cosmote and Austrian bank Erste Bank, are ramping up their investment into Eastern European markets and tapping into rising consumer demand.
Aside from these developing stories, we find that pan-European companies are generally becoming better at rewarding shareholders through more progressive dividend policies. Backed by strong balance sheets and respectable cashflow, many of these companies have the capacity to continue to pay dividends, whatever the economic climate. In spite of this, European markets are less expensive on a price to earnings basis compared with other major markets such as the USA and Asia ex-Japan.
Given solid fundamentals, the outlook for pan-European equities remains robust. With private equity spending money plentiful, M&A activity should provide an additional catalyst in the short to medium term. Meanwhile, market volatility enables equity managers to add to their positions opportunistically, picking up good quality stocks at attractive levels. However, as always, the main risk to the investor is of investing in a poor company, and careful stock selection is crucial.
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