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The World eyes Europe

Headlines in Europe are again focused on weak economic growth but there remain many companies well placed to deliver. Analysis of Nick Sheridan, Fund manager Henderson Horizon Euroland.

Article also available in : English EN | français FR

A successful investment strategy normally involves a degree of pain, either emotional or financial, and relies heavily on taking the right opportunity at the right time. It may seem like common sense to say, but you only get the opportunity for abnormally good returns when fear is at a premium.

The one area of the world that has been most affected by negative sentiment is probably the eurozone. A range of factors have weighed on sentiment, including the strength of the euro, the heightened level of geopolitical uncertainty, driven by the conflict in eastern Ukraine, and because integration has not progressed quite as quickly as hoped. Together, this has left eurozone equities heavily discounted versus their global peers. This is backed up by the evidence.

Relative value

The cyclically adjusted price/earnings (P/E) multiple ratio is one of the best tools we have to assess relative value. Equities in the eurozone region remain priced well below their long-term averages, and are particularly attractive on a relative basis versus the US.

The strength of the euro has been a big factor behind why eurozone growth has not been as strong as hoped.

However, the European Central Bank has stuck to its pledge to ease monetary policy significantly, including cutting its deposit rate to below zero. September saw the first tranche of the Targeted Longer-Term Refinancing Operation (TLTRO), aimed at increasing bank lending.

Weakening euro

These measures have contributed to the euro falling in value relative to the US dollar since its peak in early May 2014. Currency weakness will help the eurozone in two ways. Firstly, it will import inflation through the goods that are bought externally. Secondly, exports will become more attractive to other countries.

Supporting the case for eurozone equities, the region is home to plenty of cash-rich European companies that have successfully rebuilt their balance sheets and are now well positioned for merger and acquisition activity, or to return money to investors via higher dividends or share buybacks.

We are in a transition period where previously optimistic investors are now focusing on the bad news in Europe. This will pass, but in the meantime investors have an opportunity to invest in good companies at attractive values.

Nick Sheridan , November 2014

Article also available in : English EN | français FR

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