In the investment world most of the commentary in the UK has been around how Brexit uncertainty over the past couple of years has chipped away at the valuations of UK-based assets. And London Stock Exchange-listed equities are certainly more attractively priced than comparable peers listed on other exchanges in developed markets. Long term buying British now could well prove to be a winning strategy for those investing online.
But what about European assets? Here in the UK we sometimes forget that Brexit doesn’t just affect the UK economy. We’re the second largest economy in the EU after Germany and a hugely important trading partner for the nations of continental Europe. The combined EU may hold the stronger cards when it comes to negotiating the terms of Brexit. But that doesn’t mean the rest of the single market is immune to the downsides hurting UK assets.
And the rest of the EU doesn’t only have Brexit to worry about. Italy has fallen into recession as a result of the budget dispute between its new right wing coalition government and the European Commission. France has seen economic disruption and falling business confidence as the fall-out of gilets jaunes protests for greater social equality. Populism is on the rise in many EU nations and the Italy situation and rising interest rates in the USA are pushing up borrowing costs.
It’s all contributing to European stock markets also being under a bit of a gloomy cloud. And that could represent another opportunity for canny, long term investors with an eye for a bargain.
However, much like as is the situation for the UK, the long term outlook for the Eurozone economy looks healthy. And the chances are it may well bounce back faster than the UK’s. A major influence right now is new diesel emissions regulations which have caused weakness in the car and auto manufacturing sector. That’s had a particular impact on export-driven Germany’s economy. With half of Eurozone GDP based on exports, slowing global economic growth is also biting. That should also be temporary with the cycle turning again within a few years as emerging markets regain traction.
Chris Hiorns, manager of the Eden Tree Amity European fund commented for The Times:
“Despite some headwinds, the European economy remains in better shape than it has been for much of the past decade. Weakness in the automotive sector, resulting from new diesel emission regulations, should only be temporary.”
Lower oil prices easing the strain for European households and the European Central Bank taking a cautious approach to raising interest rates are also put forward by Hiorns as positives for the Eurozone economic outlook over the next couple of years.
Tips To Uncovering European Investment Bargains
Those investing online and interested in screening individual European company stocks for value should, as always, focus the search on those with strong long term underlying fundamentals. Competitive advantages are also a key quality to be on the lookout for. Established brands, for example, are better able to maintain prices and, therefore, margins, compared to generic alternatives or those with a less established name.
A company such as LVMH, the French luxury brands umbrella corporation that owns the Christian Dior, Kenzo and Givenchy perfume brands as well as the likes of Louis Vuitton and Moet Hennessey would qualify as there. As would Germany’s Adidas, Italian fashion label Salvatore Ferragamo and auto manufacturers such as BMW, Daimler and Volkswagen. Emerging markets returning to growth and an end or easing to the U.S.-China trade dispute would be expected to light a fire under this category of exporters with strong brands.
French industrial giant Legrand has some strong technology advantages over its competition and Sanofi, another French stock, is a pharmaceuticals giant with a strong portfolio and pipeline. Germany’s pharma and life sciences behemoth Bayer is also hard to ignore.
Current valuations are also, of course, critical. Investors should be sifting for stocks with a competitive advantage that also look cheap at the moment for one reason or another. Many analysts believe a shift in investor sentiment that will again show more favour to ‘value stocks’ can be detected. The last 15 years or so have very much favoured growth companies to the detriment of uninspiring but profitable companies in more traditional sectors.
Mike Clements, SYZ Asset Management’s head of European equities highlights a handful of Eurozone stocks that he believes currently look like they represent good value. These include tyre manufacturer Michelin, packaging company Smurfit Kappa and Imerys in the industrial minerals sector. All currently trade at below ten times earnings and offer stable dividend yields of 4% or higher.
John Bennett, who heads up the Henderson European Focus investment trust picks out a few more obscure European companies he believes represent strong technology innovation, are well established in under-the-radar sectors, have good future prospects and currently trade at bargain valuations. His suggestions of companies investors would do well to take a closer look at inclues Finnish winter tyre specialists Nokian Renkaat, which has solid market share in northern Europe and North America. He also likes the look of a mid-sized German family company few will have heard of – Knorr-Bremse. Knorr is a market leader in train and truck braking systems and stands to particularly benefit from any thaw in the U.S.-China trade war.
Those investing online who aren’t keen on the prospect of analysing and choosing individual stocks themselves can of course look towards funds that focus on European equities and assets instead.
Fund research house Morningstar, picks out two Europe-focused investment trusts its analysts believe are currently attractively discounted. They are:
Jupiter European Opportunities: ‘gold rated’ by Morningstar’s fund rating system, the Jupiter European
Opportunities investment trust is managed by Alexander Darwall. Over the 18 years and counting Darwall has been at the helm, the trust has returned 656% compared to the 110% returned over the same period by the MSCI Europe index benchmark. However, over the last 3 years the trust has performed below the benchmark. That’s dampened investor enthusiasm to the point it now trades at a heavy discount of -3%.
However, Morningstar analyst Samuel Meakin feels a bump over the last few years shouldn’t discourage potential investors. If anything, it opens up a bargain opportunity for a trust he describes as:
“a standout choice for European equities. Its unconstrained, high-conviction approach delivers very strong risk-adjusted returns and limit losses in down markets”.
Henderson European Focus: another fund whose recent performance has slipped below impressive returns over the longer term, leading to discounts. Managed by John Bennett since 2010, the fund has doubled the returns of the benchmark over that period, with investors benefitting from gains of 133% since the turn of the decade.
However, over the last 12 months the fund has lost 14%, a performance 3 times worse than the benchmark. There have also been comings and goings in the management team with that uncertainty turning off some investors. The net result is the fund currently trades at an 8.5% discount. But Morningstar analyst Peter Brunt still has conviction that the trust will turn things around under Bennett:
“We consider the approach, which combines macro and micro research, to be robust and disciplined in nature.”
An article in The Times also asks investment experts to highlight European equities funds they currently like the look of. Jason Hollands of Tilney Group plumps for the Jupiter European Opportunities fund again while also adding the FP Crux European Special Situations. The latter invests in mid and small-cap European companies as well as large caps, which the Jupiter funds restricts itself to. It also puts an emphasis on dividend-paying stocks.
Winterflood Securities’ Annabel Herman is another that highlights the Jupiter fund in her two suggestions. Her second is Fidelity European Values, pointing out its bias towards companies that represent ‘quality and growth’.