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Joel Copp-Barton, European product director at Invesco

Subsiding macro pressures highlight valuation opportunities in European stock markets

Following the investment community’s extended focus on relative safety and accordingly stretched valuation levels in the more defensive areas of the market, the less negative macro environment could give investors an additional reason to explore opportunities in the more unloved areas of the market, according to Invesco’s European equity team in Henley-on-Thames, UK.

“We believe being exposed to these so-called ‘safe assets’, such as consumer staples, becomes increasingly dangerous at ever higher valuations, even more so if markets become less fixated with ‘disaster economics’ and re-focus on stock picking and fundamentals,” says Joel Copp-Barton (pictured), European product director at Invesco.
His team’s analysis highlights several factors pointing to subsiding macro pressures in Europe. While the ECB has created a more credible backstop to sovereign funding worries in the periphery, PMI surveys are recovering and lead indicators are beginning to turn upwards.

“That’s not to say that the economic outlook in Europe is rosy, more that some of the intense pressures on the economy are fading, which is normally a good sign for equities,” Copp-Barton says.

The fact that lead indicators for Europe troughed in 2012 we believe suggests that GDP could start to improve in 2013. In addition, improving lead indicators in other regions signal better prospects for European exports as well. As it is, the pressure on operating margins for the non-financial sector in Europe is starting to fade.

“Better sales combined with stable wages and input costs should provide some gradual tailwinds as we move through the year,” Copp-Barton notes.
He believes this could encourage the markets to be less focused on safety at all costs and start to reassess the prospects of the unloved stocks and sectors and the very negative outlook being implied by their share prices. Invesco’s Henley European Equity team currently sees particularly attractive valuation opportunities for specific companies in the following areas: pharmaceuticals at the more defensive end; financials; growth industries including aerospace and defence and commercial/professional services, as well as macro-sensitive areas such as media and construction.

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