Invesco sees attractive valuation opportunities in the more ‘unloved’ areas of European Equities
While investor sentiment towards European equities remains sceptical in general, the flight to low risk and higher certainty has led to an increasingly extreme divergence in ratings between those areas of the market and European equities as a whole. This is creating opportunities in the more unloved parts of the market, Joel Copp-Barton, European Product Director at Invesco Perpetual, argues in its Monthly Summary issued in July 2012…
Compared to German bunds yields, dividend yields on EU equities are currently more attractive than at any time in the last 90 years. If invested at all, fund managers have, in general, favoured areas of the European equity markets which have a high degree of certainty.” This has included defensive sectors such as consumer stocks. Given their relatively high valuations and the loss of earnings momentum in some areas seen recently, Copp-Barton sees little likelihood of a further re-rating of the consumer areas from current levels.
Instead, Invesco Perpetual’s Henley European Equity team continues to find opportunities in shunned parts of the market based on its bottom-up, stock-specific valuation philosophy. These include such areas as financials, pharmaceuticals and specific industrial sectors, many of which are trading well below their 10-year averages2. In certain cases, this includes companies in Spain and Italy, where we think the discount being applied by the market for being domiciled in those regions is excessive. This market view ignores some well-run companies, with good managements, which have significant exposure outside of Europe.
Share prices can remain at a discount to their fair value for an extended period of time, with the slowing of the global economy an unhelpful backdrop that could put some pressure on short-term earnings expectations across all regions. However, the significant de-rating of certain areas of the European market and the market as a whole over the last three years provides some mitigation of downside risk. The prospects for these companies are more tied into reducing the tail risks associated with the Euro and its long-term viability as opposed to any improvement in the macro environment.
On this front, Invesco Perpetual’s European equity experts draw hope from the results of the recent EU crisis summit as policymakers have outlined a blueprint to deal with some of the pressures affecting the European banking system. Given the long drawn out nature of the sovereign debt saga people are bound to be sceptical, but we take some comfort from the fact that keeping the euro together suits more people than not. Indeed, fleshing out the details could help to re-gain some much needed confidence and finally start to see the risk premium reduce from very high levels. This could see some of the extreme valuations within European equities finally reduce, as well as narrow the gap with other asset classes.
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