Value to be found in European equities, says BlackRock
Return on equity investments should not be confused with economic growth and the focus should be on cash flows, one of the key themes of the current economic situation, said Nigel Bolton, head of European equities at BlackRock.
“We buy companies and not countries. Europe remains under-owned and relatively cheap and equities in Europe are yielding more than corporate bonds,” Bolton said, speaking in London at the Morningstar Conference on May 15.
While the European economic and political outlook remains negative, some corporates can still offer interesting opportunities, in particular because Portugal, Italy, Greece and Spain account for less than 10% of European capitalisation.
As an example, Bolton mentioned Irish airline company Ryanair, expected to deliver a 8% dividend, and Finnish escalator manufacturer Kone, which is recording a strong growth in Asia.
“You will have more volatility with equity, but in a 5-year view you will make more money than investing in bond,” he said.
At the same time, investors are not allocating money in Europe, as they fear about the macroeconomic situation of the region. According to a recent survey carried by BlackRock, investors’s concerns vary across regions. In the UK, the main concern is stock market volatility, while for Germans it is the financial strength of other European countries.
“Greece is a real political melting pot and recent elections have shown a real lack of credibility. The population has had enough of austerity but there is little alternative. Greece shouldn’t be staying in the eurozone. Their economy is too different and they don’t have appealing exports. Greece has got to be cheap, and I don’t think the country will be in the euro in two years’ time,” Bolton said.
Meanwhile, Spain is facing different but equally worrying issues, following the real estate GDP boom experienced by the country over the last years.
“We see value in Spain but we need clarity over the political and economic situation. Another issue for the country is the financial regime. My concern is that Santander and BBVA will be asked to help other Spanish banks who are in a ‘mess’. I am not questioning their survival. Overall, peripheral Europe remains uncompetitive, with fixed exchange rate exacerbating the issue,” he said.
The outlook is slightly different for Italy, where the technocrat government headed by Mario Monti has done a positive job, according to Bolton.
“Following recent reforms, in Italy the average retirement age has been increased to 68. This is one of toughest retirement ages in Europe. The Italian government has also put in place a strong tax regime. I am confident that Italy is on the road to recovery. The industrial structure is much stronger than the one in Spain and Greece,” he said.