Franklin Templeton’s Uwe Zoellner sees slower, but persistent growth in Europe
The days of debt driven growth in Europe are over, which means investors should expect slower but more sustainable growth, says Uwe Soellner, head of European Equity at Franklin Templeton.
In Europe, things have improved considerably since last year. I think there is a positive backdrop for equities. But I don’t think we will return to the golden era of the late ’90s to 2008 because we will not see that level of debt-driven growth again. Growth rates globally will likely be more pedestrian but, on the other hand, I believe they will be more sustainable.
I would stress that the long-term outlook for Europe remains positive. However, I think we will continue to see volatility going forward and the last few months have demonstrated that. Volatility is something we have to get used to, but, in our view, it can also bring opportunities. We have a bottom-up approach to stock selection and our process is to evaluate companies on an individual basis. We tend to be contrarian in our style, meaning our philosophy and process often leads us to segments of the market that are out of favour with other investors. I think this year our approach will be more important than ever because you can’t buy indiscriminately in this market. In particular, you have to be cautious of some defensive companies or companies with global exposure in consumer sectors that have been most investors’ favourites but which are quite expensive right now.
Many investors have shortened their investment horizons and become a bit more cautious, due to market uncertainty and news about downgrades. But I think now people are looking at the long-term outlook for European equities and they are thinking about the potential upside. I believe the long-term story in Europe is about further structural reforms. We expect to see a normalization of the situation in large parts of Europe, which should be a future driver of performance.
Quite a few countries in Europe are cutting their labour costs. Germany ran into trouble long before the global crisis due to the costs of reunification. As a result, it had to make adjustments to its economy, which improved its unit labour costs and its competitive advantage within the eurozone. By contrast, other countries in the eurozone became more expensive and less efficient, and now the pressure is on them to reduce costs.
Ireland was the first eurozone country to make real progress on structural economic reform. But Ireland is not alone in embracing the economics of austerity; we are seeing similar reforms implemented in other countries across the eurozone. In Spain, we have seen a drop of 10% in unit labour cost since the peak, which shows that progress is being made through these reforms. We have clear progress in many countries, where a decline in unit labour cost implies improved competitiveness.
Encouragingly, market data indicate companies in southern Europe are becoming more competitive. Spanish companies, faced with anaemic growth in their domestic market, have had to look beyond their borders for compelling growth opportunities. This is a common theme across the region. It’s a slow process and may take three to five years, but we believe progress will come. Also, if we are to see real momentum, we think the global economy must be supportive of this incremental growth.
We still see some laggards, such as Italy and France where we still have political resistance to reform In general, however, we see good reason to be optimistic, since reform efforts should boost profitability and create significant potential for stock markets in Europe.