It is true to say that there has been a lot of negative newsflow about Europe recently, but our view is that investor fear creates opportunities. A combination of the Greek sovereign crisis, the ending of QE2 in the US and rising emerging market risks, leads us to believe that the recent sell off in European equities offers an attractive entry point. …
Rory Bateman, Head of European Equities
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This is not to say that there are not compelling opportunities to invest in growing companies based in the peripheral nations but, as austerity measures take hold, it makes sense to avoid companies that rely largely on domestic demand to drive their revenues. Despite this predominately ‘north-south’ divide in Europe, it is worth noting that the peripheral countries of Portugal, Ireland, Greece and Spain make up less than 12% of European GDP1 and less than 7% of European market capitalisation (2).
The opportunity that lies within Europe can be illustrated by a combination of factors. We believe that many companies in the region have excellent future growth prospects and, in our opinion, now is a cheap entry point.”
With the risks in perspective, we think there are a number of compelling reasons to invest in European equities.
Strength in core Europe
Germany, France and the Nordics, in particular, continue to perform well and drive growth in the region. Notably, recent GDP data from Germany was much stronger than the market had anticipated, with annualised quarterly growth of 6.1% in the first quarter (the overall euro area annualised quarterly growth for the first quarter was 3.8%).
A healthy corporate sector
At the corporate level, Europe offers an opportunity to invest in a wealth of unique and productive global franchises, which are currently trading at a discount due to the negative newsflow, something that is evidenced by the increased M&A activity. Indeed, we have recently seen a number of US companies buying European franchises to take advantage of the depressed valuations; including Johnson & Johnson’s bid for Synthes (Switzerland), while Terex and Dupont made bids for Demag Cranes (Germany) and Danisco (Denmark) respectively. Recent corporate results have also been very strong, with approximately two-thirds of companies reporting sales and earnings ahead of consensus for the first quarter.
(1) Source: Schroders, 25 March 2011
(2) Source: Schroders, MSCI, 24 March 2011
Important Information:
The views and opinions contained herein are those of Azad Zangana, European economist, and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds. For professional investors and advisers only. This document is not suitable for retail clients. This document is intended to be for information purposes only and it is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The material is not intended to provide, and should not be relied on for, accounting, legal or tax advice, or investment recommendations. Information herein is believed to be reliable but Schroder Investment Management Ltd (Schroders) does not warrant its completeness or accuracy. No responsibility can be accepted for errors of fact or opinion. This does not exclude or restrict any duty or liability that Schroders has to its customers under the Financial Services and Markets Act 2000 (as amended from time to time) or any other regulatory system. Schroders has expressed its own views and opinions in this document and these may change. Reliance should not be placed on the views and information in the document when taking individual investment and/or strategic decisions. Issued by Schroder Investment Management Limited, 31 Gresham Street, London EC2V 7QA, which is authorised and regulated by the Financial Services Authority. For your security, communications may be taped or monitored.
Source: ETFWorld – Schroders
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