Managers re-evaluate Europe’s chances of full economic recovery

As Europe’s slow recovery starts to gain traction, global income managers are finding opportunities to pick up attractive yields on stocks coupled with a good chance of capital growth as well.

The continent’s recovery has lagged the rebounds seen in the US and UK since the financial crisis, primarily because of the additional crisis within the eurozone. While the US exited its recession in 2010 and has barely looked back since, the eurozone has struggled to maintain any meaningful growth and slumped into a second recession in five years in early 2012.

The impact on investor sentiment towards Europe was such that those willing to take the risk were rewarded “just by believing the euro was not going to break up”, according to Cazenove’s James Sym, manager of the group’s £185.5 European Income fund.

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Now though, sentiment is improving as data picks up – albeit from a low base. Global managers at Henderson and Liontrust have been buying into European dividend-paying stocks in recent months in the hope of capitalising on the recovery.

Andrew Jones, co-manager of the Henderson Global Equity Income fund, says he has been buying financial stocks – among those worst hit by the downturn on the continent – as they have cleaned up their balance sheets and increased their cash reserves enough to pay attractive dividends to investors.

The manager has added holdings such as French giant BNP Paribas and Deutsche Boerse, owner of the Frankfurt stock exchange, as well as some insurance companies, but has a “broad” exposure to Europe within his portfolio.

Liontrust earlier this year altered the mandate of James Inglis-Jones and Samantha Gleave’s £285m Income fund to allow it to invest on a global basis, and the main non-UK region of interest in the first few months has been Europe.

Ms Gleave remarks that Europe is currently more attractive than other regions having been somewhat left behind by the US’s recovery. While the US stockmarket has an average dividend yield of roughly 2 per cent – well below inflation – the manager says Europe’s average yield is nearer 3-3.5 per cent.

“In Europe, you can find a number of companies with a high dividend yield and opportunities to grow,” she says. She highlights Swedish phone company TeliaSonera as having a high payout ratio while also having cut costs and revamped its business model.

Mr Jones also backs telecoms companies to do well in Europe, predicting that the gap in valuations between US-based and Europe-based telecoms companies is likely to reduce as European companies regain lost ground.

There are 18 European equity funds in the IMA sectors with an income focus, 13 of which were launched since the start of 2007, suggesting a strong case for the creation of a dedicated sector.

But the recent poor sentiment towards the region has led investors to pull significant amounts of money out of European funds in general, stifling demand.

IMA statistics demonstrate the big swing in retail investor sentiment towards Europe: the IMA’s three European equity sectors recorded three straight years of net retail outflows in 2010, 2011 and 2012, with investors withdrawing a net £2.3bn overall, as the plight of Greece and other peripheral European countries increased fears of a meltdown across the continent. But in the first eight months of 2013 alone a net £1.1bn was invested back into European equities.