8th July 2013
You don’t need to love Europe in order to invest in it and some valuations are ‘generationally’ low argues Stephanie Butcher, European Equities Fund Manager at Invesco Perpetual.
In a note issued this week, Butcher says that the MSCI ex UK index is up around 43% in sterling terms since June last year but that mistrust lingers which means there is a huge amount of value in the market.
She writes: “Draghi’s ECB is possibly the only European institution with market credibility. The market rally has climbed a wall of worry including the left-field results of the Italian election, and the farce that was the Cypriot bail-out. But climb it did. What is required to see markets climb further? The good news is that we don’t need to love Europe in order to invest in it.
“At current levels valuations are so cheap on a cyclically adjusted basis that I believe the environment simply needs to be ‘less bad’ for Europe to be an attractive case. We could point out that Europe is chock-full of world class companies, which have international exposure, and are thankfully run by first-class managers not politicians, but that has been the case for a while and it hasn’t persuaded investors thus far.
“As investors we have one role – that is, to find under-valued assets, whatever those assets might be. Most appear to be persuaded that bonds are intrinsically over-valued. Equally, many seem persuaded that equities are, at this point, a cheap asset class.”
She says that few seem to accept that Europe is the global value play, while within Europe itself, there are areas of the market which sit at generationally low valuation levels.
Butcher says that on a price/earnings adjusted 10-year through-cycle basis, Pan-Europe is 25% cheap, the Economic Monetary Union block is 37% cheap, but Italy and Spain are currently sitting in the range of 50-60% below their long-term average Shiller PEs2.
She adds: “So after five or so years of economic trauma, with car sales, TV advertising, and property markets falling in some cases 50% plus, these markets are trading at trough multiples on trough earnings.”
“We are pragmatic and open-minded as to the sources of sustainable dividend income across Europe. Valuation, yield and dividend growth opportunities in Europe are in our view attractive, but not necessarily in the ‘traditional’ income sector. Where we currently see most potential is financials, the periphery and selected cyclicals where dividend revisions are improving, and valuations and pay-out ratios are low.”