European equities are back on track

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The outlook looks rosy in the wake of the rebound

European equities have enjoyed a major rally: they gained 20%1 in 2013 and have risen by more than 30% over the last 18 months. Eurozone equities have fared even better.

  • European equities had strong returns over calendar 2013
  • The outlook has promise provided earnings recover

Well diversified internationally

This much neglected asset class has had a fantastic year and a half as investors opened their eyes again to the fact that European companies, or more precisely companies that happen to be listed in Europe, do not depend solely on the health of the European economy for profits. Most listed European companies are generally much more diversified internationally than Japanese or US companies.

Of course, central banks and European authorities have contributed to improving investor sentiment. Political uncertainty has fallen. Financial markets are now more focused on the healing of the economy, improving conditions so that companies can thrive and re-establish profitability.

Opportunities in long-neglected sectors

Investors returning to this market in the last 12 months have concentrated on stocks of companies that were more exposed to the domestic economy and that suffered the most in the crisis. They include banks, but also long-neglected sectors such as telecoms or utilities. Banking stocks should benefit as banks’ capital ratios improve further, loss provisions fall and market consolidation boosts profitability.

When we invest our clients’ money, we believe it is crucial to invest in stocks of companies operating in well-structured markets – either already well-consolidated or going through consolidation. Equally importantly, we look for opportunities where themes or fads and a short-term approach have cut valuations while fundamental qualities have been neglected. In other words, we are stock pickers.

Attractive versus other asset classes

Mid to long-term, I’m positive. It is apparent that European equities are still undervalued relative to their own history and compared with US equities. In addition, they remain valued attractively compared with fixed income. Apart from companies in consolidating or consolidated industries, I would add those which have been neglected in the rebound – the growth companies and the more defensive ones. I think now could be a good time to look at them again.

The name of the game will now be to pick those companies whose earnings growth is fundamentally strong and sustainable.

More information about European Equities on Parvest website.

[1] The EURO STOXX 50 index gained 20.1% in the period 01/01/13 to 31/12/13; source: Bloomberg

Olivier Rudigoz

Portfolio Manager, European equities

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