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January 12, 2015 at 08:20 PM
It is official: Europe has slipped into deflation and macroeconomic concerns for the future of the Eurozone economy are once again top of mind. As investors closely watch the European Central Bank (ECB), what’s their take for Europe in this first part of the new year? Global Investing Insights spoke to a few.
Eric Sagmeister, portfolio manager, Forward Dividend Signal Strategy: Core earnings recovery needed to spur domestic economies
Back in the third quarter of 2013, Europe was trading favorably at a seven or eight price-to-earnings ratio, which made it quite attractive to many investors, said Eric Sagmeister, portfolio manager of the Forward Dividend Signal Strategy. However, “that was without any substantial earnings or GDP increases to back it up,” he said, “which meant that when earnings came through, it was clear that the rally would be limited.”
Now, with deflation a reality, many investors will expect to see quantitative easing happening shortly in Europe, and that could spark another rally. “But what we really need is for core earnings to recover on the domestic corporate side in Europe,” Sagmeister said. “This hasn’t happened in Europe and we have just been stuck at that point for some time.”
That is frustrating, he said, for investors who would want to be able to choose names beyond the European large cap and multinational companies, which have been better performers. However, “people do need to remember the great diversity of Europe and the fact that it’s not one central bank for one economy,” he said. “The ECB’s task is monumental and it has to deal with multiple economies.”
The current low value of the euro will help European exports a great deal: “A 10% euro depreciation is estimated to have a positive 5% impact on nominal exports and a 0.75% positive effect on nominal GDP, and with quantitative easing, it’s an even better cocktail,” Sagmeister said. He’s currently positioning his portfolio to take advantage of companies in, among others, the pharmaceutical and biotech sectors, technology and consumer durables sectors, all of which can benefit from exports into the U.S. and elsewhere, and he is also positioning himself carefully for the recovery in Europe’s domestic sector by pinpointing specific small- to mid-size names. However, for those opportunities to pan out, “we really do need a significant recovery in earnings to come in the middle of this year,” he said.
Quincy Krosby, Market Strategist, Prudential Financial: Dividend paying stocks attractive but macro situation must be addressed
For Quincy Krosby, market strategist at Prudential Financial, European valuations are still attractive and there are some very good dividend paying stocks that are well worth investing in.
However, with Greek elections around the corner and the left-wing Syriza party – which wants to renegotiate the terms of Greece’s bailout package — apparently a lead contender in the polls, Europe’s stability and the stability of the euro are Krosby’s greatest concern and the factors that will dictate investing in the region in the early part of this year.
