JP Morgan PB wonders if it is time to revisit European equities
Raj Tanna, European equity strategist and César Pérez, EMEA chief investment strategist at JP Morgan Private Bank have looked at the case for investing in European equities.
It is easy to see why European equities have been out of favour for so long. In asset allocation terms, being underweight Europe versus the US has been an outstanding call.
With European equities underperforming their US counterparts by 36 % since the beginning of 2010, many investors have chosen to avoid the region altogether in their asset allocation, leading European equities to the lowest weighting in globally managed portfolios in five years.
However, we have taken a closer look at a segment of the European corporate sector, the one with little exposure domestically and with most of its profits coming from abroad.
The fundamentals at the company level for this sub-sector of names in Europe are stronger than they have been for a number of years. Yet the uncertainty caused by Europe’s sovereign debt crisis has led to the share prices of those companies being negatively affected despite these constructive underlying fundamentals.
Despite all the uncertainties still to come, we believe recent market volatility offers opportunities to get exposure to the shares of a few carefully selected large-cap multinational companies listed in Europe.
The European Union as a whole has seen a significant increase in total debt levels, yet the balance sheets of certain European multinational companies outside of the financials sector are in better shape than the countries in which they are listed.
The solid growth outlook coming from their global revenue generation leave these companies relatively well placed over both the short and long term. Company profits are close to multi-year highs in Europe and other parts of the globe and we are often questioned on the sustainability of profit margins at these high levels.