We remain upbeat on European equities, Invesco’s Surplice says
John Surplice, European Equities Fund Manager at Invesco, sees value in companies exposed to European economic
recovery, including financials, in 2014
Although European stock markets started the year with a correction, John Surplice, European Equities Fund Manager at Invesco, remains upbeat on European equities in 2014. In his view, the key driver fuelling European stock markets this year will be a return to earnings growth and the recovery
of the banking sector amid a generally more benign risk landscape.
“In my opinion, risks in Europe are a lot lower now than they have been at any time over the last two years,” Surplice notes. As he points out, bank capital has been largely rebuilt and economic imbalances have been reduced, with many countries turning current account deficits into surpluses.
While budget deficits remain too high in some places, he expects these to come down to more manageable levels over the next couple of years.
Although only modest growth is projected for the eurozone this year, many of the companies listed on eurozone stock markets are global companies with international exposure.
Based on expectations of 1% GDP growth in the eurozone this year, Surplice expects low double-digit earnings growth for the European market. In this environment, his focus is on stocks with some earnings upgrades and earnings growth potential rather than yield plays.
More specifically, the Invesco expert sees value in banking and financial stocks. Following several years of downward pressure on profitability, current financial sector earnings are 60% below where they were in 2007.
“It’s important to remember that the bank sector has earnings that are more sensitive to economic growth than any other sector. So, as the economy improves, you are going to get this reflected in upside to earnings estimates for the banking sector,” Surplice points out.
“Given the current low valuations, this should mean that the sector has the potential to perform well as long as the regulatory environment remains benign, or not too onerous.”