If 2013 was a year of fragile convalescence for Europe, 2014 will be one in which the battered region continues to regain strength, bolstered by improving underlying fundamentals and much-needed, long-term changes.
For fund managers who specialize in the region, Europe presents numerous attractive investment opportunities that despite the general improvement in the region remain untapped. That’s because many investors are still concerned that European GDP numbers are weak, says Rory Bateman, head of UK and European equities at Schroders, and this has led them to stay away from Europe, albeit that 2013 was a far better year for the region overall.
“We are finding that valuations even in the markets most affected by the crisis are compelling, and performance is still 40% to 70% below the 2007 peak,” Bateman said. “There is a lot of value contained within the markets in Europe.”
Many also have not yet factored in the prospects for an end to Europe’s woes and in 2013, expectations for the region were still low, according to Stephen Peak, director of international equities at Henderson Global Investors. The risk premium in Europe is still at elevated levels despite the market appreciation, which means that the valuation of European equities remains compelling versus history and as compared to other equity markets around the world.
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As such, “exploring more eurocentric ideas reaped rewards as the recovery took hold,” Peak said, and this year, Henderson expects to selectively increase its exposure to Europe.
“Europe has travelled a long way, however, there remains some navigating to be done and we expect the ‘saw tooth’ pattern of markets to continue,” Peak said. “We still believe in recovery within Europe but judge that some form of pause or pullback might be in the offing and we are awaiting earnings upgrades. Political noise will still be a factor, tapering risk comes in the form of the US, European Union reform is needed to support long-term stability and banks still need some work.”
This area is particularly important, since the improvement of Europe’s corporate sector depends largely on banks’ ability to extend credit, or not.
“However, on balance, our view is that Europe is under-appreciated and there remains valuation upside, particularly versus the US, and we suspect positive earnings surprises if recovery takes hold,” Peak said. “We believe the overall case remains a good one and offers upside for the portfolio.” Through the course of last year, Peak added several European names to his portfolio, including European Aeronautic Defense and Space Company (EADS) in the industrials sector and Amadeus IT Holding, a technology company.