Standard Life Investments

Published Article

Investment Adviser - Multi Manager Column – August 2013


A number of advisers I have recently met see Europe as something of an ugly duckling, as it faces the continued prospect of sub-trend growth over the next few years. There are also a number of uphill battles still to contend with: potential debt write offs for weaker countries need to continue, structural reform has to remain high on the agenda and banking reform has to be agreed and implemented. Against this rather gloomy backdrop, it is easy to become dismissive of a region that may not be quite as ugly as first impressions may indicate.

For example, over the last 12 months the FTSE All World Europe ex UK Index has returned 34.5%*, outperforming all the other major indices. In addition economic data shows signs of improvement, the latest PMI manufacturing data was strong with Italy, France, Germany and the overall Euro-zone figures coming in ahead of expectations. Second quarter GDP also fell by less than the preceding two quarters and the unemployment rate finally appears to have turned a corner after having the biggest fall in six years.

So far in the latest earnings season, 56% of STOXX Europe 600 companies have met or beaten analyst forecasts, while France and Germany have shown particularly strong results with about 80% of blue chips beating forecasts**. Since March, Europe has provided more positive growth surprises than the US. This shows that European stocks can deliver, particularly since they are starting from a low base.

We believe that European companies with a clear strategy, strong balance sheet and both the confidence and financial means to invest in their business to increase market share do exist. These are important factors in times of uncertainty. A number of European companies also derive a significant proportion of their earnings from outside Europe; they are diversified global entities that are not reliant on the ‘attractiveness’ of Europe in isolation. While acknowledging the expectations for Europe are low, it is a diverse region and companies have the ability to grow earnings if they have the financial capabilities.

Fiscal problems remain a constraint; despite improvement in valuations and corporate competitiveness, certain sectors are still struggling with credit availability. One reason Europe’s economic prospects lag the US is because of how companies raise finance. Banking loans account for 80% of Europe’s corporate financing, compared to approximately 20% in the US. This is likely to dampen recovery but should increase efforts to develop other lines of credit availability. Hence, companies with strong balance sheets or a visionary approach to accessing finance are likely to prosper.

The region is not going to transform into a swan overnight but for advisers with underweight positions we believe that it is worth considering. In our MyFolio Funds we have just increased exposure to the region.

*Source: Datastream to 31 July 2013

**Source: Thomson Reuters Starmine

Bambos Hambi, Head of Fund of Funds Management, Standard Life Investments