Signs of stabilisation bring investors back to Europe, says AXA’s Hargraves

Mark Hargraves, manager of the AXA Framlington European Fund, shares his latest views on European equities.

Signs of a stabilisation in southern Europe have sparked investor interest back to the region. This has also been helped by the fact that relative alternatives are less attractive. The US is doing well but increasingly expensive, while emerging markets have clearly lost their shine. Europe is trading towards the low end of its 30 year relative PE to the US, so looks attractive.

While the outlook in Europe is improving we should not get too ahead of ourselves, the fundamental backdrop remains tough. Notwithstanding this, over the past 12 months I have been increasing domestic exposure to Europe. This has primarily been by adding to financials (Soc Gen, BNP, ING, KBC) as they have a treble discount embedded in them (euro crisis, economic crisis and regulatory change), all of which are improving.

Other areas I have been looking at are good franchises trading at a cyclical trough on very low valuations. Pickings here are more difficult as often balance sheets are a concern, but a good example is Mediaset, the leading private TV broadcaster in Italy. Three years of falling advertising markets has walloped profits, but cost cutting and signs of stabilisation in advertising markets have provided a good base for recovery, the stock has doubled in four months on advertising sales turning only slightly positive year on year highlighting the longer profit recovery potential.

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