“Broadly speaking, we think Europe is past the worst.” That’s reassuring news for investors interested in European equities. While there are still caveats that advisors should keep in mind, Stephen Peak, director of international equities for Henderson Global Investors and manager of the European Focus Fund (HFEAX), is optimistic about the region overall.
“At the moment, we’re showing clear signs of recovery, certainly from where we were a year or two ago,” Peak told Investment Advisor in December. “There are really strong pockets and signs and signals across Europe here and there—not universally, there are still some issues to be certain—but Europe is in recovery mode.”
That move to recovery will become more evident throughout 2014, Peak said, but he was careful to note that it won’t happen quickly. “Over all, we have to be realistic. We’re not going to get back in a hurry to the traditional growth rates that we became used to leading up to the global financial crisis. We’re still in a lower growth environment. Nonetheless, we think that growth is going to have more recovery, and we think the evidence will be clearer as we travel through 2014.”
Peak was reluctant to call any particular region in Europe off limits. “Geographically, there are no no-go areas because even in the roughest of times for individual areas—if you go back a year or two to Southern Europe, when everybody thought Southern Europe was pretty much a no-go area for fairly obvious reasons—you can still find individual stocks where the market was throwing the baby out with the bathwater.”
However, there are some sectors that advisors should approach cautiously. One that has some promise but requires advisors to remain selective is the financial sector, according to Peak.
“The U.S. banking sector deserves credit for doing a pretty good job of recovery,” he said. “Europe is not quite there. It’s going through that process where banks have to restructure, sell off non-core assets and raise more money on occasion. We think that process is ongoing, and we think European recovery probably plays hand in glove with the better tone for the financial sector. Good selectivity for financials will be important in the year ahead.”
Resource-related companies, particularly those that deal in metals, are another area where Peak is treading carefully.
Reiterating his point that Europe is looking at recovery, he said the region has been getting more interesting. “The previous winners in Europe if you go back—not this year but certainly over the last few years—have been the high-return companies, typically the consumer staples companies, those with exposure to emerging markets. In other words, the best recipe was to find equities with as little to do with Europe as you could possibly find because Europe is dull and the rest of the world is more interesting. Clearly, 2013 has seen a switch around of that. We’ve oriented the portfolio to have a bit more European sensitivity, shall we say, in terms of the geographical profile of our holdings.”