Raj Tanna, European equity strategist and César Pérez, EMEA chief investment strategist at JP Morgan Private Bank have looked at the case for investing in European equities.
We believe that we are at a point in Europe where the ongoing political uncertainty for the past two years has depressed many equity prices to levels which in some cases are disconnected with the fundamentals. We are talking in particular about a sub-set of companies with strong balance sheets, high profit margins and revenue exposure to growing markets across the globe.
The contagion of Europe’s sovereign debt crisis into its equity market offers investors a targeted opportunity to build exposure to shares in large, well-diversified, high quality multinational companies. The broad-based sell-off means these shares trade at significant discounts to global competitors – largely because they are listed in Europe.
We sometimes refer to these companies as being “listed in Europe by mistake”. Whilst the crisis will continue to make headlines, certainly over the medium term, it is important to note how low investor expectations are in terms of seeing any real progress towards resolution.
These companies’ large dividends effectively pay investors to wait for the shares to gradually close the valuation gap with their global peers. Notwithstanding, stock selection is extremely important, with a focus towards large capitalisation companies with international revenue exposure, and strong balance sheets combined with high profit margins.