European Pensions – European equity markets hidden attractions
17 May 2010
The European region is going through a difficult period as the Euro project is challenged by the divergence in fiscal policies. While it is tempting to write off the region, I believe that at the end of a volatile period we will have a more coordinated fiscal policy, a European “IMF”, and possibly a common Debt Management Office.
The current environment is throwing up several investment opportunities. Firstly, the market under appreciates the diversity of European economies. Norway is a country with very different dynamics than the rest of Europe, thriving economy with low unemployment (3%), house prices above previous peaks, and little Government debt. This sets the scene for its main financial institutions, DNB Nor and Storebrand, to enjoy very different dynamics than their peers. They will have better volumes than expected, will benefit from higher interest rates, and in particular DNB Nor will have a lower cost of risk than forecasted.
Moreover Europe offers the opportunity to invest in companies which have not only world class technology but also have maintained their R&D investments through the crisis in contrast to other players. Among them we would highlight: Philips, the only company with presence in the whole value chain of LED general lighting; ASML, world leader in lithography equipment for the semiconductor industry; and Temenos, leading provider of banking software.
Finally, there are subsectors that investors can only gain exposure to through Europe, among them: Deepwater oil services, where the European companies have a clear dominance; Luxury goods where French, Italian and Swiss companies are the world leaders; and Renewable Energy with European companies leading in wind energy.
European equity markets will be subject to the uncertainty around solving budget deficits, however we believe this environment offers plenty of investment opportunities for Pension Funds operating in Europe.
Jaime Ramos Martin, Manager of Standard Life Investments European Equity Growth
First published in the June Edition of European Pensions
