Sovereign debt woes have produced a seemingly endless stream of bad news out of Europe in the past year, but fund managers say the outlook for the continent is not all negative.
In fact, many fund managers expect economic growth in Europe to beat market expectations in 2011, which could bolster equities market returns. Fund managers are particularly confident about commodities, technology and sectors with exposure to emerging markets.
However, fund managers warn that 2011 will be a bumpy ride, with lots of volatility as sovereign debt problems continue to hamper confidence. Still, they believe corporations with strong fundamentals will be rewarded.
\u201cWe\u2019ll see tension, we\u2019ll see volatility,\u201d says Simone Loke, vice president and director with Toronto-based TD Asset Management Inc. <\/b> and lead manager of TD European Growth Fund. \u201cBut on the whole, it\u2019s actually underpinned by strong corporate earnings and companies doing quite well.\u201d
Adds Luc de la Durantaye, first vice president, asset allocation and currency management, with CIBC Global Asset Management Inc. <\/b>and manager of CIBC European Equity Fund: \u201cA number of economic fundamentals point toward Europe not being the basket case, necessarily, that is depicted by some of the media. I think the consensus might be surprised a little bit by the growth of the core European market.\u201d
Although headlines have recently been dominated by news of huge fiscal debt loads, high unemployment rates and weak economic growth in peripheral countries such as Portugal, Ireland, Greece and Spain, these countries comprise less than 20% of the region\u2019s gross domestic product. In contrast, prospects for core European countries \u2014 such as France, Germany, Switzerland and the Netherlands, which collectively contribute more than two-thirds of the region\u2019s economic activity \u2014 are good.
\u201cEurope as a whole is not necessarily weak, even though we\u2019re seeing sovereign crises right now,\u201d says Loke. \u201cWe\u2019re still seeing relative growth in the whole region.\u201d
The International Monetary Fund expects the eurozone to grow by 1.5% in 2011. But fund managers are considerably more optimistic, forecasting growth of more than 2%. They note that low interest rates have stimulated the region and depreciation of the euro has been highly supportive for export-heavy countries such as Germany \u2014 and they expect both rates and currency to remain low in the year ahead.
This economic expansion should help corporations grow their profits by an average of 10% in 2011, according to most fund managers\u2019 estimates.
\u201cYou have the economy in pretty respectable condition, you have export markets generally in pretty respectable condition and you don\u2019t have huge wage pressures,\u201d says Rory Flynn, global advisor at Dublin-based AGF International Advisors Co. Ltd. <\/b>and co-manager of AGF European Equity Class fund. He expects profitability growth to help European stock markets advance by 20%-30% in 2011.
Also fuelling this rebound will be inves-tors taking advantage of attractive valuations throughout European markets. Sovereign debt concerns have prompted many investors to flee from European equities, pushing valuations down to levels below those in Canada, the U.S. and many other countries.
\u201cPeople have sold European markets [due to] the fear of contagion,\u201d de la Durantaye says. \u201cThere\u2019s a high risk premium that\u2019s priced in in the current environment.\u201d
Flynn sees attractive valuations throughout the continent, but particularly in Spain, which has come under scrutiny for its high fiscal debt. The concern is overblown, Flynn says, as its debt level remains manageable: \u201cSpain really stands out as a place that has a lot more value than any other part of the planet. The Spanish economy isn\u2019t the basket case that people seem to be worried about.\u201d@page_break@Other fund managers, however, are staying away from equities in all of the so-called \u201cPIIGS\u201d countries \u2014 Portugal, Italy, Ireland, Greece and Spain \u2014 regardless of how attractive the valuations are. \u201cWe\u2019re very underweighted in the peripherals,\u201d says Loke, explaining that these markets continue to be highly volatile. \u201cThere will be a time when they become cheap enough, but I think we\u2019ll wait for that for the time being.\u201d
Instead, she\u2019s overweighted in countries that will benefit from the weaker euro supporting stronger export activity, such as Germany, Sweden, the Netherlands, Switzerland and Britain.
\u201cThere\u2019s a lot of misunderstanding in terms of Europe as a homogeneous area,\u201d she says. \u201cThere are pockets where opportunities lie \u2014 and that\u2019s how one should look at Europe; not as one country.\u201d
Flynn finds that some of the best opportunities are in the financials and telecommunications sectors. He favours France T\u00e9l\u00e9com SA and Spain-based Telef\u00f3nica SA, which offer highly lucrative dividend yields.
Bank stocks throughout Europe have been punished by sovereign debt concerns, even though, as Flynn points out, they\u2019re not all directly involved in the turmoil; the bank problems in Spain are in the smaller banks. Flynn sees particularly impressive value in France-based BNP Paribas and in Grupo Santander, a company that owns Spain\u2019s largest bank, Banco Santander SA. Grupo Santander is a global bank that gets much of its revenue from Latin America.
Other fund managers, however, remain wary of banks as the credit problems continue. Loke has little or no bank holdings in the PIIGS countries, but is bullish on financials elsewhere, particularly those with exposure to emerging markets. She is partial to HSBC Holdings PLC, Standard Chartered PLC and Prudential PLC, all of which have extensive presence in Asia.
Many other sectors in Europe have ties to emerging markets such as China and India, and many fund managers are focused on tapping into those with the most exposure to these high-growth regions. Examples include energy and materials, industrial goods and consumer discretionary stocks. \u201cWe see opportunities in the oil and energy sector,\u201d says de la Durantaye. \u201cOil prices will continue to be well supported, and we could start seeing shortages again.\u201d
Loke agrees that raw materials\u2019 prices will continue to rise on emerging markets\u2019 demand. She is currently overweighted in materials, energy and industrial goods stocks. \u201cIndustrialization in the emerging markets is definitely benefiting Europe exports, especially in capital goods and industrial goods,\u201d says Loke, who adds that capital goods companies will also benefit from increased domestic activity this year, as companies begin spending the hoards of cash on their balance sheets.
For this reason, she\u2019s also bullish on technology stocks: \u201cIf companies want to improve their efficiency, they\u2019ll want to increase [technology spending].\u201d
Fund managers are divided on consumer discretionary stocks. Parus Shah, portfolio manager with Fidelity Investments<\/b> in London and manager of Fidelity Europe Class fund, believes the sector will benefit from the rapidly growing middle class population in emerging markets. \u201cExporters are benefiting from demand from the emerging countries and also benefiting from demand from higher-end consumers, both in Europe and the U.S.,\u201d says Shah, who especially recommends France-based luxury consumer-goods company PPR SA, which owns such brands as Gucci, Yves Saint Laurent and Puma.
Other fund managers are underweighted in consumer discretionary stocks, concerned that government austerity measures will undermine spending in 2011. Says Loke: \u201cThere\u2019s a lot of cautiousness among consumers.\u201d
Many fund managers are optimistic about the health-care sector\u2019s prospects, particularly as the population ages. Shah likes Novo Nordisk A\/S, a Denmark-based company focused on diabetes care. \tIE<\/b><\/p>\n","protected":false},"excerpt":{"rendered":"
Despite sovereign debt woes in some European countries, many fund managers expect market growth to exceed expectations and bolster market returns. Says one manager: \u201cThere are pockets where opportunities lie\u201d<\/p>\n","protected":false},"author":4,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":[],"categories":[3013,3018],"tags":[2403,2505,3212],"yst_prominent_words":[],"acf":[],"_links":{"self":[{"href":"https:\/\/www.investmentexecutive.com\/wp-json\/wp\/v2\/posts\/317002"}],"collection":[{"href":"https:\/\/www.investmentexecutive.com\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.investmentexecutive.com\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.investmentexecutive.com\/wp-json\/wp\/v2\/users\/4"}],"replies":[{"embeddable":true,"href":"https:\/\/www.investmentexecutive.com\/wp-json\/wp\/v2\/comments?post=317002"}],"version-history":[{"count":1,"href":"https:\/\/www.investmentexecutive.com\/wp-json\/wp\/v2\/posts\/317002\/revisions"}],"predecessor-version":[{"id":363280,"href":"https:\/\/www.investmentexecutive.com\/wp-json\/wp\/v2\/posts\/317002\/revisions\/363280"}],"wp:attachment":[{"href":"https:\/\/www.investmentexecutive.com\/wp-json\/wp\/v2\/media?parent=317002"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.investmentexecutive.com\/wp-json\/wp\/v2\/categories?post=317002"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.investmentexecutive.com\/wp-json\/wp\/v2\/tags?post=317002"},{"taxonomy":"yst_prominent_words","embeddable":true,"href":"https:\/\/www.investmentexecutive.com\/wp-json\/wp\/v2\/yst_prominent_words?post=317002"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}