European equities story less fatalistic than portrayed, says Mutual Series’ Brugere-Trelat
Mutual Series Executive Vice President Philippe Brugere-Trelat sees good opportunities in the European equity market.
European equities on average are still roughly 50% below their peaks and are currently priced at 12 – 13 times earnings, compared with 14 -15 times in the US.
Particularly striking is the dividend-yield, the average dividend yield for European equities is 3.6%, versus 2.1% in the US.
There are many good companies in Europe with strong balance sheets at attractive prices, paying good dividends. The obvious push-back is the argument that, of course, European stocks are cheap for good reasons: there are terrible things happening in Europe and Europe is in crisis.
I think that is total nonsense. The euro isn’t likely to disappear. The central bank is making sure there will be little chance of financial panic in the system. As we see it, the tail risk in Europe from a macro point of view has fallen dramatically.
European corporations appear to be in good health. Labour costs are declining, and most companies have been managing costs pretty aggressively, which leads to better margins. They have strong balance sheets and have been deleveraging for years. Europe is home to a very large number of multinational companies with a big global footprint which derive a big portion of their earnings from outside of Europe. That is helped further by a weak euro, which makes their exports competitive.
And unlike in the US, where the central bank is talking of “tapering” its asset purchase program, the interest rate environment will likely stay accommodative in Europe for some time. The European Central Bank’s president has reaffirmed monetary policy will remain accommodative as long as necessary.
Labour costs have fallen between 10 – 30% in the ‘problem’ countries, which are becoming more competitive. Exports are also rising. Some countries have seen significant turnarounds in their current account balances. For example, Italy has a primary surplus and has passed a balanced budget amendment.
In addition, Europeans are realizing austerity alone is not the only solution and growth is needed. I’m confident after the German election in September we will see progressive measures implemented. I think we are reaching an inflection point in European economic activity that could lead to positive earnings surprises, maybe not in 2013, but in 2014. Some recent economic indicators have turned positive or are rising, such as industrial production, retail sales, auto registrations and consumer confidence.
I am not expecting any great fireworks as there are problems to be addressed, particularly in the banking sector. But I think earnings expectations are so low, even a modest improvement will have a profound impact on European equities. People will focus on short-term problems in places like Portugal right now, for example, but we have to take a longer-term view and look at all the data with a clear and rational mindset.”
Finding Value in Europe
We are very wary of what’s happening in Japan. If you look at the results of Japanese companies, I don’t see any great impact yet from the monetary policy actions. Many of the big exporters have more of their production outside Japan, so they are not directly benefitting from the low yen.
What Are the Risks?
All investments involve risks, including possible loss of principal. The value of investments can go down as well as up, and investors may not get back the full amount invested. Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors, or general market conditions. Special risks are associated with foreign investing, including currency fluctuations, economic instability and political developments. Investments in developing markets involve heightened risks related to the same factors, in addition to those associated with their relatively small size and lesser liquidity. Current political uncertainty surrounding the European Union (EU) and its membership may increase market volatility. The financial stability of countries may increase the economic risk of investing in companies in Europe. Value securities may not increase in price as anticipated or may decline further in value.