An opportunity not to be missed
Put seventeen disparate nations with competing interests in a room together and it is not surprising that progress in the eurozone is painfully slow.
Despondency reigns, particularly among those countries in southern Europe where low or negative rates of economic growth are compounding the sovereign debt problem.
Such nations are caught between the Scylla of austerity and the Charybdis of a common currency: the austerity packages needed to keep bond markets happy blocking the path to growth, whilst the euro straitjacket prevents devaluation as a rapid way to improve competitiveness. At first glance, this is not a promising backdrop for investing in European equities. Yet far from being a lost cause we consider Europe an opportunity too good to pass up.
Many worried investors are preferring to hold high levels of cash but we think this is a mistake. Cash may offer capital security but at current rates of inflation investors are facing a negative real rate of return. Alternatively, an investment in so-called ‘safe haven’ long-dated sovereign bonds is the equivalent of locking in a sizeable loss in real terms if inflation persists or worsens. In contrast, plenty of European companies with strong track records and good business models are offering dividend yields of around 4 per cent. This is an attractive income stream from equities for those investors who have the patience to wait for an improvement in the economic environment.
Eventually, we will emerge from this crisis, fitter and leaner than before. In the meantime, investors can be gaining exposure to companies with strong balance sheets, a decent return on capital, pricing power and recurring revenues. An example of such a company is Kerry Group, an Irish foods company. A truly global player, it has only 8 per cent of its sales from Ireland. Over the past 25 years, the company has delivered annualised earnings growth of 15 per cent and has raised its dividend every single year. Similarly, Germany’s Fuchs Petrolub is a leading global lubricant business. The quality of its products means that customers prefer to buy its reliable product – which represents a tiny operating cost – than risk damaging expensive machinery and equipment. The founding family retain a controlling stake in the business and are represented on the board.
Whilst European governments struggle with high debt levels, many European companies are enjoying stronger and stronger balance sheets. To avoid the risk of these resources being taxed by desperate governments, we prefer companies where assets and sales are spread across many jurisdictions. Symrise, which is a fragrance and flavourings business based in Germany, generates around half of its sales from emerging markets. Similarly, Fred Olsen Energy is a Norwegian oil services group. Its revenues are in US dollars rather than euros. It has a current dividend yield of 9 per cent and the founder has a 53 per cent stake in the company, aligning management with shareholder interests.