Investment Week - Europe
17 June 2010
Bull Points:
- Valuations and dividends are attractive
- Euro weakness a potential significant tailwind
Bear Points:
- Funding concerns for both banks and governments
- More regulation and taxes
European markets have undergone a torrid time of late given the worries over Greece and the potential contagion into the likes of Portugal and Spain. Austerity packages are de rigeur at the moment and a raft of them have been announced. As a result, the more optimistic growth scenarios for 2010 and 2011 and beyond have now come under greater scrutiny. It is fair to assume that growth will be slower going forwards given the deleverage that we will continue to see as developed economies get use to the fact, that for the moment, the times of plenty are over.
In spite of this, and with the exception of perhaps the banks where the triple headwinds of regulatory reform, funding constraints and deleverage by both the consumer and corporates are evident, European companies are in good shape. Valuations look attractive if one is willing to take a constructive view beyond the six months that the market seems to be worrying about. Euro weakness has come at the perfect time to offset some of the growth concerns. Approximately 40% of revenues come from outside the Eurozone and therefore European companies are going to see the benefits in terms of sales, profits and competitiveness. The leverage could be even greater given the the efficiency drives that European companies have enacted when the Euro was strong.
If one is not comfortable with growth then the level and sustainability of dividend income from European companies remains underappreciated and pays you while you wait. Income can be generated from some interesting and diverse sources. The average dividend yield of the telecom sector is above 7% reflecting concerns over revenues and potential cash outflows for capital expenditure, however balance sheets appear robust and a number of companies have committed to dividend stability and even growth going forwards as in the case of KPN, the Dutch incumbent. Strong franchises abound and these companies have grown in spite of the crisis. For example, Novo Nordisk, the Danish diabetes drug company. It grew earnings and the dividend by more than 20% last year. Swedish Match, the smokeless tobacco company, has continued to dominate its domestic market, see growth in the US and take measures that realise shareholder value as seen in their cigar joint venture with Scandinavian Tobacco. PPR, the luxury to retail conglomerate, is a slightly different case and was yielding about 8% in March last year as the market worried about its high debt levels and consumer exposure. It now yields 4%, not because it halved its dividend but because the share price has nearly doubled. Opportunities abound in Europe and are there for the taking.
Will James, Investment Director, European Equities, Standard Life Investments
First published in Investment week 28th June 2010
