The Taking Stock panel conduct a lively discussion on the situation in Europe which is full of debate, controversy, opinion and views. The discussion was chaired by David Stevenson of the
Financial Times who was joined by investment experts
from Alliance Trust, Aberdeen Asset Management,
JP Morgan Asset Management and F&C Investments.
David: Why would I want to invest in Europe at the
moment? Where’s the growth going to come from?
Stephen: There’s been an enormous amount of coverage of European
affairs focusing overwhelmingly on political Europe. Political Europe
is very different from economic Europe and economic Europe is very
different from corporate Europe. Corporate Europe is one of the most
widely diversified investment areas in the world. Nearly half of all
revenues are generated outside the eurozone, so domestic European
growth is not as important for European companies as overseas trade
and export markets.
David: So in a sense Europe is not dissimilar to the
British markets - full of quality big companies selling
to an internationally diversified market. Surely
the big concern is that the rest of the world is still
slightly dependent on what happens in Europe.
Sam: I think they certainly are, but we tend to get very excited
with equities when pessimism is at its highest. I mean, when your
Grandma asks you about the Euro you know it’s a widespread fear
and generally that is reflected in the stock market which tends to
discount things early.
David: I suppose the big concern is at the end of
day, valuations may be low but they are based on
expectations of profits and profits are unlikely to
advance much in Europe. It’s difficult to mount a case
for investing in European equities, or are we being
Bertie: I think we’re probably being a little bit too pessimistic, but at the same time
I think we’re always over generalising about the European market as being one
large entity. There is a great degree of diversity within Europe, I think if you focus
on companies that have long term structural growth drivers, that’s really where
you should be looking as an investor in Europe. I think stock picking is even more
important than it probably has ever been at the moment so you need to focus on
the companies, not overly generalise and not think about markets too much and
really be a bottom up investor.
David: The big question for me and I think for an increasing
number of investors and commentators is where is the growth
Bertie: You don’t necessarily have to have growth to have good stock market
returns. Admittedly it’s nice to have, but if we wound back a year and looked at
the view on what was happening in Ireland, you never would have guessed that
now we’re looking at a year where Ireland, as measured by MSCI was the best
performing stock market globally so you can get very good returns when the
outlook is very poor.
David: Fiona, at Alliance Trust you have quite a wide view. What
do you think looking at both regionally and sectorally are the
most interesting European ideas for you at the moment?
Fiona: I think it is worthwhile looking at the regions of Spain and Italy. I think
it’s maybe a bit early, but I actually remember, the Swedish banking crisis and
made a lot of money. I did the work and it was maybe six to nine months later
when I actually finally did the investment, so you have to go to these regions, identify opportunities early. You might not invest in them but you then know
the timing. For example, people don’t like Spanish banks at the moment but
they’re further down the line of cleaning up their property sector potentially than
other countries are. They’re quantifying it to some extent and you’re going to
end up with a very consolidated sector there with just a few leading players.
David: How cheap are some European markets?
Stephen: I think if you looked at it as an area, there’s always an issue with using
any particular valuation multiple - P/E, price to cash, dividend yield. There are issues
with each of them, but if you look on a blended basis then the market is relatively
attractive at the moment. If you look at the return available in equities relative to
other asset classes, more than half of all European markets trade with a dividend
yield that’s higher than their local bond yield.
David: Sam what are the real pockets of value that you see?
Sam: Despite the move we’ve had in financials, I still think it’s an area which
European investors are generally underweight in. Again you’ve got to look at the
stock specifics, you don’t want to be going out there and buying any bank, you
want to be able to find a bank that’s well capitalised that actually can get funding
at decent rates and you’ll find actually that their competition in the lending market
has disappeared and they can make great margins on the lending, despite the
higher regulations they can make very good returns. I also think technology is an
interesting area. I should think technology and financial areas are where you can
find very good value.
David: Bertie, where are you finding the most compelling values?
Bertie: I think when one looks at the sectors, the way that we construct portfolios,
we start with the stocks and actually the sectoral overlay is really a function and
output of that from the bottom up. One good example where we still think it’s
good value would be the industrials.
David: Fiona what should investors’ exposure to Europe be?
Fiona: Well, it depends on your levels of risk, because if you’re a long term investor then you can
easily have exposure to solid companies such as Nestlé and L’Oreal that have been around for a
long time and they will still be around in the future. They’re a low risk investment that just happen
to be based in Europe so I think you could easily have exposure to those types of companies in your
portfolio, so definitely 15% to 20% of your portfolio.
David: Where’s your hunch? Should investors be in line with the amount of
Europe as part of the MSCI World? Do you think it should be overweight or
Bertie: I wouldn’t be underweight at the moment. I’d probably be equal weight or overweight. We
talked already about the valuation opportunities there are in Europe but I think you have to carefully
distinguish between actually buying the market and stock picking. I think you need to focus on
stock picking, so I would advise investors not to necessarily buy an ETF or a tracker fund that gives
you exposure to the European market, per se, but focus on people who provide funds that actually
focus on the bottom up because it’s actually the companies that will have structural growth that will
continue to flourish given how uncertain the macro environment is, and I think that’s the kind of
vehicle investors need to have exposure to.
Sam: I’m not an asset allocater but I think the level of pessimism should give you more
encouragement to buy the European equities. If we looked at the returns last year and the problems
that Europe had, yes it was negative but actually the BRIC countries performed worse than Europe
and that reflects the fact that the consensus is to be overweight the emerging markets. But actually
when the consensus is telling you very often you shouldn’t be doing it, that actually makes me very
excited about the market.
David: If I’m looking for quality stocks big, globally diversified companies, why
wouldn’t I just go and invest in America or the FTSE 100?
Sam: The straightforward answer is the valuations and they are materially different. The valuations
of the US companies versus Europe. I wanted to quickly pick up on the Japanese point. Europe and
Japan have been compared, but the problem with Japan is the shareholder culture there has been
very poor and the Olympus scandal of last year reflects that. That was many, many years after they
first went into the crisis and the shareholder culture in Europe has improved dramatically over the last
10 years. It’s still got further to go in some countries but I think shareholders are looked after a lot
better in Europe than somewhere like Japan and other emerging markets.
David: Given a straight choice between investing in
the Anglo Saxons, the UK and the US and Europe,
is Europe facing up to its problems? Would you
secretly be investing in the USA?
Bertie: No I don’t think I would. I think I would be looking to
invest in pan Europe really. I think the UK and Europe is a good
blend of companies and gives you a good blend of exposure to
global growth and companies with strong intellectual property
and they’re trading on rock bottom valuations in many instances. I
do think the shareholder value has got better; the focus on boards,
corporate governance and all the things that we’ve talked about
is improving. It’s still a long way behind where it is in the US and
the UK. In some instances that’s not necessarily a bad thing but I
do think that investors have to go into European investments with
their eyes open. I would be positive on Europe I think there are
some great companies there.
This round table event was filmed at the Tate Modern,
London on 15 February 2012. All information was correct at that time but please keep in mind the following information:
Investment markets and conditions can change rapidly and as such the views expressed
should not be taken as statements of fact nor should reliance be placed on these
views when making investment decisions. Forecasts are opinion only, cannot be
guaranteed and should not be relied upon when making investment decisions. Past
performance is not a guide to future performance. The value of investments and
the income from them can fall as well as rise and is not guaranteed. Investors
may not get back the amount invested. Whilst care has been taken in compiling
the content of this video, no representation or warranty, express or implied,
is made by Alliance Trust Savings Limited as to its accuracy or completeness.
Nothing said or covered in this video should be construed as being an invitation
or inducement to engage in investment activity. No advice is given by Alliance
Trust Savings Limited. For advice on investing, please consult an independent
financial adviser Alliance Trust Savings Limited is registered in Scotland,
Company No. SC 98767. Registered office at PO Box 164, 8 West Marketgait, Dundee
DD1 9YP; Alliance Trust Savings Limited is authorised and regulated by the Financial
Services Authority and is entered on their register under number 116115 (www.fsa.gov.uk)
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