Despite the ongoing uncertainty surrounding Greece’s debt problem, Invesco Perpetual’s European equity team are upbeat on Europe. In a Q&A session today with two leading fund managers although it was noted Europe has been uniquely impacted from a double whammy – the global banking crisis and more latterly the Euro crisis, the good fundamentals were highlighted. Money printing or QE which has weakened the Euro clearly benefits exporters, whilst core inflation is relatively stable. This means higher import costs from the weak Euro are not damaging to domestic economies. In fact the fall in the oil price has acted like a tax cut. Money supply and bank lending have risen and economic growth is evident.
The fundamental case for European equities however are the excellent valuations in economically sensitive cyclical stocks and the banking sector whilst generally the market is valued below its 30 year average. Defensive stocks in contrast are less attractively valued. Moreover Invesco believe earnings in 2015 have been underestimated and are likely to be upgraded. If so dividends will rise especially as the corporate sector holds high levels of cash.
In summary for value investors like Invesco (more on this in the next blog) Europe offers plenty of good investment opportunities. Whilst they take account of macro-economic conditions Invesco are principally stock-pickers. I concur this is a market for active fund management given the disparity of valuations and earnings upgrade potential.
My penny’s worth is that good dividend yields, in major part due to low valuations, coupled with dividend growth potential will attract money to European equities from more highly valued markets like the US or even from government bond investors. Monetary policy such as QE has driven government bond yields to very low levels, some bonds even have negative interest rates (see http://www.marketwatch.com/story/more-than-25-of-euro-bond-yields-are-negative-but-that-could-change-2015-02-02 for an explanation). With an appetite for yield European equities should be attractive for income investors.
This blog is intended as general investment commentary. It is not an invitation to invest in the areas highlighted as these may not be suitable for you. You should seek individual advice before making investment decisions.