JP Morgan AM’s Macklow-Smith asks if investors will return to Europe

Peripheral concerns should not take centre stage when it comes to European investments, says JP Morgan Asset Management’s Stephen Macklow-Smith, who manages the JP Morgan European Growth investment trust.

He said that exports rather than consumption or government expenditure is the key driver of growth in Europe.

“Around 50% of European companies’ revenues are from outside Europe, and emerging markets are key. Throughout the recent crisis many European companies have been quietly prospering, simply because they make the stuff that the rest of the world is queuing up to buy.”

Political risk remains, but Macklow-Smith (pictured) believes the outside world has underestimated the commitment to the euro. There are elections in Germany this year, but the major parties are all pro-Europe. Italy’s election poses more risk, he suggests.

Meanwhile, austerity measures in peripheral economies such as Spain and Ireland are starting to lead to improved competitiveness. Lower unit labour costs have seen pharmaceutical firm Bayer move its global production of the key ingredient in aspiring to Spain.

As matters improve in the peripheral countries, this could result in investment opportunities in banking stocks. “The rebound in cyclicals will continue, but more domestically focused sectors such as telecoms and utilities will continue to suffer.”

However, despite the positives, allocations to Europe remain low, Macklow-Smith said.

“Since the bottom of the market in March 2009, European equities (with dividends reinvested) have risen by 100%, but European equity funds under management have gone down by half. Very sophisticated investors have begun returning to European equities over the last six months, and over the next 18 months that will start to filter down the chain. In 2012 European stocks managed to outperform both the US and the UK. That means they are no longer as cheap as they were, but if we get some growth back in emerging markets, all the market positioning they’ve worked so hard to build up will pay off.”

 

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