European equities are trading at five-year valuation lows due to growth fears and record fund outflows. However, lost among the headlines is the fact Europe is home to many of the world’s leading businesses.
“Growth has slowed, but it has not fallen off a cliff,” said Pras Jeyanandhan, co-portfolio manager of the Oyster European Opportunities fund at SYZ Asset Management.
As a result, he argued that market uncertainty and unease represent a “window of opportunity to purchase companies still wearing tattered rags, whose fortunes are set to change like the fairy-tale princess”.
European equities crashed out of favour with investors over the last year, which saw the longest run of persistent outflows in a decade. For 2018, net outflows from active European equities funds totalled €44bn, with another €14bn in the first two months of 2019.
European market participants were battered by disappointing economic news and a deteriorating macro picture. In addition to being plagued with worries about a global slowdown and the US-China trade war, they faced region-specific problems, such as the ‘Yellow Jacket’ protests in France and political uncertainty in the UK and Italy.
Nonetheless, Jeyanandhan said domestic demand drivers remain supportive of a 2019 GDP growth of about 1.5% for the euro area.
“Declining unemployment at six-year lows, rising real income, positive consumer confidence and very accommodative financing conditions all point to growth stabilisation. The latest PMI and consumer confidence numbers also indicate a rebound from 2018 year-end lows,” he said.
“Despite worries profit margins and other company fundamentals would come under pressure, the estimates for next year’s earnings, which incorporate Q4 and full-year 2018 results, are back on an upward trend.”
Unsung opportunities
Europe is still home to many leading companies, Jeyanandhan points out. “While they may not generate as much fervour as Amazon or Apple, companies such as Louis Vuitton Moët Hennessey, ASML and Prudential are world-class in their own right.”
“In fact, we view the negative international sentiment surrounding European equities as an excellent contrarian buying opportunity.
“The growth scare has led to an unwarranted discount – even after the year-to-date rally, investors can access European equities at five-year valuation lows. These are especially attractive compared to US equities on measures such as price to book, with US stocks trading currently at a P/B of 1.3x more than European stocks.
“Though currently unloved sectors and stocks are more economically sensitive, when chosen correctly, they have the ability to outperform the most in an eventual rebound. We are therefore investigating areas of the market such as the energy, auto and tech hardware sectors where valuations imply we are in a mild recession,” he said.
“Where everyone else sees rags, we know the best companies will eventually be donning their rightful ball gowns.”
