25th February 2016
Invesco Perpetual fund manager, Stephanie Butcher examines the present threats and opportunities in European equities…
Looking at what’s been going on in financial markets since the turn of the year, I think it has been dominated by macro.
If one’s view is that we are going into a global macro recession, then you don’t want to own European equities, because the truth is European equities always act as a very high beta variation on the macro environment, so it’s not so surprising that European markets have started the year so poorly.
If we look at the two main areas that people are concerned about – the US and China – we believe those fears are overstated and, as such, we think that there are some very strong opportunities to invest in Europe again.
So, with that in mind, on the view that the global economy is okay – it may not be super robust but it’s certainly okay – we can then look at Europe and what the opportunities are here, and I think this is where things actually look quite bright.
Lead indicators continue to suggest that GDP in Europe should recover over forward months, in addition to the loose monetary policy in Europe; we’ve got input costs which are very supportive: the ECB is there, ready and waiting to do more. With the markets having been so nervous over recent weeks, it is a good time to be looking at equity opportunities again.
The valuation case is where things become really quite interesting. The earnings story for Europe is really a function of the fact that they haven’t started picking up at all yet. As we stand today, the Shiller PE is standing more like 14 times in Europe with the recent selloff, and that is still showing a very significant potential for returns moving forward, which we believe is the standout opportunity in Europe today.
With regards to the income case, if you’re looking for yield, we really think that Europe is a crucial area to be looking at, and this is without really stretching for it. If for example, you look at the cash-to-asset-ratio for European non-financial corporates, you can see that the cash-to-asset ratio remains very high, really echoing the equity-risk premium.
Furthermore, the earnings-catch-up is mirrored from dividends. As earnings recover and pay-out ratios remain stable, then clearly, dividend growth should also echo the earnings.
We’ve always said we’re focused on valuation and the standout valuations are in areas like financials, oil and gas, telecommunications, parts of the periphery, and we’re underweight in areas such as consumer staples.
To be honest, I think the country weightings are less important today than they have been in the last three years, so it’s much more about sectors for us. We are valuation-focused and style-agnostic.
Therefore, over time, we will shift between value and growth styles, depending on where we think the valuation opportunity is greatest. Today, valuation very much favours value, and that’s why we are more tilted towards value than we would be typically.
Our view is European growth and global macro environment is intact. Earnings are slowly improving, and we think there’s a lot of opportunity in many sectors with standout valuations, but positioning is absolutely crucial, and we believe that this is not a time to be herding with the crowd.
Equity income in Europe remains very robust and we think this is a great opportunity to be looking at the sector again.