Increased volatility earlier this year in the bond and foreign exchange markets triggered a vicious ...
Increased volatility earlier this year in the bond and foreign exchange markets triggered a vicious sell-off in global equity markets. But despite tumbling share prices, not much has changed for the companies themselves. As a result we have found little cause for prolonged pessimism, and indeed these corrections often make for excellent buying opportunities. In such volatile times, however it is necessary for investors to focus more than ever on company fundamentals and valuations.
With the European market trading on a P/E ratio of just under 12 times for 2007, and seeing forecast earnings growth next year just shy of double digits, we believe European equity offers great value both in historic terms and relative to other assets. Balance sheets are the strongest they have been in 20 years and economic growth in Europe nowadays is at long last creating positive momentum - this looks to be the first year in many that the European Central Bank (ECB) will have to revise upwards its forecasts for eurozone gross domestic product (GDP).
Areas of special interest currently include European large-cap financials, and Western European property stocks. In the case of the former, real value is beginning to emerge. Some of the largest European financial names are trading on less than 10 times next year's earnings, with the likes of Fortis, Axa and ING all offering yields in the region of 5%.
The telecoms operator sector, while unfashionable, is full of stocks with big cash flows, high dividends and robust balance sheets. It remains out of favour as there is no earnings momentum - at least, no positive earnings momentum.
Telecoms operators are very much a feature of blue chip Europe and their modest debt makes them very attractive. An example of this is Teliasonera, the Swedish operator who has no debt at all. This means it can pay out all its annual cash flow to shareholders, enabling it to deliver a yield of 7%. This has considerable appeal when its yield is compared to the 4% available from government bonds and the 3% from cash. The often heard complaint about the telco sector is it has all the characteristics of a utility - indeed it does, but with higher yields.
The sort of company particularly attractive is one where demand is strong but with potential for growth, leaving supply unable to respond. This state of play can underpin significant profitability for quite some years and goes a long way to explain the reason for oil and metal companies' prices and profits continuing to stay high.
The price of oil should also remain firm over the medium to long-term - and at these levels, the oil majors generate vast amounts of cash. The oil price will most likely be volatile in both directions over the coming year, but it certainly looks set to exceed the average analyst forecast. If so, then analysts' earnings forecasts for this sector must rise, hopefully followed by the share prices.
We remain staunchly bullish about the medium-term prospects for European equities, founding our optimism on excellent fundamentals and compelling valuations. The recent and ongoing bout of mergers & acquisitions and buyout activity (the strongest for six years at least) suggests the corporate world is prepared to pay a higher price for stock market assets than investors themselves. If their confidence is not misplaced, recent sell-offs could, with hindsight, prove excellent buying opportunities indeed.
Market corrections offer buying opportunities
Low debt makes telecoms operators attractive
Oil should exceed average analyst forecast
Putting the tech into protection
Square Mile’s series of informal interviews
Fallout from Haywood suspension
Launching later in 2019
£80bn funds under calculation