DWS’ Weidenbach sees arguments in favour of European equities

DWS Investments’ Britta Weidenbach uses the German proverb ‘it is better to travel than to arrive’ to explain why now is a good time to invest in European equities.

One year ago, it was perhaps difficult to see where the eurozone, and therefore European shares, would ‘arrive’ at all. Some said ‘recovery’, others said ‘disaster’.
The ECB’s unlimited bond buying program – to “do whatever it takes” to save the trading bloc, according to ECB president Mario Draghi – means the widely accepted answer now is ‘recovery’.

But most of the total positive valuation changes in shares do not occur once markets have ‘arrived’ at a healthy investment climate, Weidenbach says. They occur “once you start to see relative improvements, even if you are in a low growth environment at the time”.

With Draghi’s ‘backstop’ and CDS spreads narrowing; with improvements in risk perception; with eurozone peripheral debt yields calming; and the fiscal consolidation / austerity burden in all the most severely troubled nations expected by Weidenbach to peak in 2012, she argues that time is now. Indeed, of 11 eurozone countries – both peripheral and core -only France is expected by the IMF to have a higher negative impact on GDP growth through the reduction of its structural deficit in 2013 than they will have for 2012.

Weidenbach, who manages about €1.3bn in two of DWS’s European/eurozone equities funds, adds the trough in year-on-year consensus GDP growth estimates for most European countries seems to have already occured in the fourth quarter, “and relatively speaking we may expect improvements from the low levels”.

In regards to CDS and equity performance, Weidenbach notes a high correlation between the average five year CDS for Italy and Spain, and the Eurostoxx 50 index (inverted).

Previous falls in the PMI indices for the eurozone, Germany, France and even Spain have all at least stabilised, if not improved, recently. At the same time, MSCI Europe price/earnings ratios are at a 28% discount to historical averages, and MSCI EMU 31% cheap. (Interestingly, though, by November the PEs on Europe’s globally focused companies (‘World Champions’) were dipping, back towards their long-term average of 11%.)

“It is always important to be in a single stock, or a region like Europe, once you see those relative improvements…because you get the strongest performance when things are changing to the positive, not when you finally see things have actually arrived at a better level.”

Jonathan Boyd
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