Eurozone: Equities offer enticing opportunities for investors

7th July 2011

This comes despite more drama surrounding the region as the Daily Telegraph reports that policy-makers from Europe and across the world have denounced Moody's drastic downgrade of Portuguese debt as an act of financial vandalism.

Faced with storm clouds following recent riots and deep-seated economic problems as Greece works out how to restructure debt, it hardly looks the place for investors to seek attractive opportunities.

From an investor's point of view the turbulence leaves the so-called PIGS (Portugal, Ireland, Greece and Spain) as no-go areas, but there are countries and stocks in the region that will still drive profits.

A range of experts give their opinion:

Philippa Gee from Independent Financial Adviser (IFA) Philippa Gee Wealth Management says: "Investing in Europe is still high risk but with most European funds, they are split between different geographical regions, so you are still getting a decent spread and should expect the fund manager to avoid any horrific areas. Europe has been, and will always be, a mixed bag, but to be willing to take a certain level of risk and ignore it altogether may be short-sighted."

Patrick Connolly from IFA AWD Chase de Vere: "There is a great deal of negative sentiment surrounding Europe and this has a knock on effect on the valuation of European stocks. This impacts on both good and poorer quality stocks. 

"It is entirely possible that there will be further problems within Europe in the short to medium term which means that share prices could fall from their current positions.

"However, it is likely that those who are prepared to invest over the longer term will do very well if buying good quality European stocks at today's valuations."

Rory Bateman, Head of European Equities at Schroders, says he thinks Europe remains a good investment opportunity.

He says: "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.

"Within Europe, the emergence of a 'two-speed' economy in terms of growth – where core Europe continues to perform well while the peripheral countries struggle against a backdrop of austerity – naturally prompts a focus on robust, global franchises within the core European countries. With these nations proving the engine of growth in the region, it is clear that it is core Europe that matters. 

"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."

Adrian Lowcock, from IFA Bestinvest says: "Just as one European sovereign debt crisis is contained, another one appears.  The reason for this is the original solution to the crisis was not absolute and not scalable.  Countries like Greece and Portugal (along with Ireland) cannot afford to repay their debt, indeed they cannot afford to run their countries budgets without making serious cuts.  The Germans, and more importantly the French are trying to delay these countries defaulting on their debt because it would cause a collapse in the European banking system. 

"The French and German banks hold too much of the Peripheral European debt that a default now would wipe out their balance sheets, causing them to go bankrupt.   Delaying the default gives them time to recapitalize and raise funds through rights issues etc.    

"But there are some tentative signs that Europe is starting to look more attractive – labour costs are now lower than in the US for the first time since 2007, and European shares trade at a 15% (price to book) discount to their US peers.  As an investment sector, Europe is a collection of countries – frequently with different characteristics. For example, Sweden's central bank has had to raise interest rates again because the economy is booming. Likewise in the Eurozone Germany is benefiting from a weak currency and exports are strong." 

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