Stay vigilant urges RBC WM European Equities specialist

Frédérique Carrier, director European Equities, Portfolio Advisory Group at RBC Wealth Management has said that investors should remain invested in certain European companies, but be vigilant given the levels of macro uncertainty and other factors.

Negative developments include poor economic growth levels across Europe and the UK, and similarly in China, while the US faces its so-called fiscal cliff. Within the eurozone itself there are particular factors at play, such as the intense wait for Germany’s Constitutional Court to determine whether the country’s government has acted legally in pledging taxpayers’ money to certain types of financial support to other eurozone member states. The demands from Spain’s regions on central government coffers is not helping, while Italy is looking at the current EFSF pot and wondering just how much is left to use, Carrier said.

Countering that is the possibility of concerted efforts by central banks – the Federal Reserve, ECB, People’s Bank of China – to give economies a helping hand. What remains difficult is determining what the balance of outcomes might be between these negative and positive forces, and the impact on the European companies that Carrier puts forward for her wealth management clients to consider.

Currently, the Portfolio Advisory Group (PAG) view is to remain underweight Europe. That said, there are a number of companies put forward by Carrier through her analysis of businesses, which she said exhibit certain properties, such as strong balance sheets, cash on the books, that are active in areas with high barriers to entry, and are able to continue growing dividends.

RBC WM clients are focused on capital preservation and yields, which makes dividends and the ability to continue growing them a significant consideration in her stock selection.

According to the most recent quarterly stock selection update, Carrier replaced Deutsche Boerse with industrial gases company Linde, citing an increasingly challenging environment for the stock exchange.

Northern European companies dominate the list, with few from the European periphery. One exception is ENI, the Italian energy company, which offers a positive restructuring story, Carrier said.

The full complement of companies in the RBC WM European Equity Focus list includes: Anheuser-Bush InBev, Assa Abloy, BASF, Elecrolux, ENI, Fresenius Medical Care, Linde, Millicom International Cellular, Nestlé, Novo Nordisk, Publicis Groupe, Roche Holdings, SAB, Schindler Holding, SES, Swedish Match, Syngenta, Volkswagen, and Zurich Insurance Group.

There remains further risk for European companies, particularly those from southern Europe, Carrier added. Should they start to perform better, continue de-leveraging, adding cash to their books and generally presenting an improving P&L account, then governments struggling with fiscal deficits may be tempted to apply windfall taxes or other policy measures.

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