Investing in Europe: Opportunities around the corner
But even with the sharpest focus on company fundamentals, reference still needs to be made to macro factors and the bigger picture.
With Europe, I have had to remain mindful of the deeply negative view that many investors hold regarding the economy and the structural weakness of the financial system. But the recent performance of the market appears to suggest that the mood is changing, with an increasing number of investors taking the view that the economic corner has been turned and that the worst of the debt crisis is finally over. Are they right, and if so, is now the time to be increasing exposure to Europe?
There are few more profitable junctures to invest than at the trough of the economic cycle. When attempting to make this call, one of the most useful leading indicators to monitor is the purchasing managers’ index, which measures the overall levels of operational confidence in private sector companies.
While PMIs around much of the world have fallen back a little recently, a number across Europe have begun to tick upwards, with several measures (especially in Germany and the UK) nudging back above 50, the level indicating growth. Spanish manufacturing has also moved to 50, its highest level for two years. So, even where growth remains elusive, momentum is turning more positive.
Much has been made of the structural challenges facing peripheral Europe because of these countries’ lack of cost competitiveness. But here too there are signs that the situation is changing for the better. Although there is still some room for improvement by France and Italy, labour costs relative to Germany have fallen significantly in Portugal, Spain and most notably Ireland.
Many investors are shunning European equities because they believe that European companies are heavily reliant on domestic consumption, which is currently being suppressed by the weight of austerity policies. But is this perception justified? I do not think so as there is evidence that exports are, in fact, playing an increasingly prominent role in the region’s economic fortunes.
When arguing the case for European equities I often cite the fact that the region is home to a significant number of global operators – large, medium and small – many of whom are leaders in their respective areas of expertise. And as the global market continues to open up, these companies are finding new sources of demand. You just have to look at the success European luxury goods brands are enjoying in China.
And the prospects for exporters could improve further if the European Central Bank’s commitment to keep interest rates ‘lower for longer’ leads the euro to depreciate against the US dollar.
