OMGI’s Freeman-Shor considers the case for European equities
Lee Freeman-Shor, manager of the Skandia European Best Ideas and the Old Mutual Global Best Ideas funds, says that with US equity markets at all time highs, it may be time to reconsider Europe.
While investors give themselves high-fives in the US as the Dow Jones hits all-time highs, things are a bit different in Europe. Only European powerhouse Germany is trading near an all-time high.
Contrast the fortunes of the US and Germany with those of other eurozone markets. The French CAC 40 Index is still trading 39% below its 2008 high and 44% below its all-time highs, achieved in 2000. Italy and Ireland are worse still. The FTSE MIB and Irish ISEQ are both trading around 60% below their 2008 highs.
If you were an investor from outside the eurozone things would have been made even worse by the fact the euro itself has lost 19% of its value versus the US dollar since 2008. These facts serve to highlight the danger of adopting a passive approach to investment. European equities may look cheap, but that doesn’t mean the market – or specific segments of the market – are going to rise.
That being said, for a stockpicker the current environment in Europe could not be better to make money. Volkswagen, a global automotive business based in Germany, is currently trading at book value, but with a return on equity of 29%. For this, you get a world-class line-up of brands, including VW itself, Audi, Bentley and Lamborghini. Already profitable, the valuation would likely rise at least in line with global growth.
In the UK we like Ashtead. With over 80% of its revenues coming from plant hire to the construction industry in the US, it is looking to benefit from both a cyclical upturn in the economy but also a structural shift in businesses renting rather than owning high-cost capital equipment.
Finally, in France there is Neopost, a leading provider of franking machines and mail room equipment. It enjoys high and stable margins, kicks off a lot of cash. As of now it offers a very attractive dividend of over 8%.
These are just a few of the interesting opportunities available in what is broadly a sluggish market.