After a year in which European markets performed quite well despite dire predictions from many observers, what should we expect in 2013?
I think it is reasonable to expect that flows to European equities could remain positive in the early part of this year as domestic investors take advantage of the main dividend-paying season from March to June.
Furthermore, global investors have been either reducing their underweight positions or even moving slightly overweight, and these actions indicate strong support, provided that no macro news upsets the apple cart.
Although the eurozone has been endlessly criticized for its rigorous and largely unforgiving approach to debt reduction, that hasn't been the case in either the United Kingdom or the United States.
However, both countries are being forced to face the realities of “fiscal retrenchment” — spending less, taxing more, saving more. This will be a stark reminder of an issue that the entire developed world is forced to face, namely, lower growth as we work off the massive amounts of debt that have fueled growth for the past 20 years or so.
This has crucial implications for stock selection. Luckily, I don't think there are many people still expecting a “return to normal,” because the “new” normal is one of low growth.
As such, the most important point that we have been making since mid-2011 is to try to find companies that are potentially part of the solution. Although it may require a little homework to find them, there are numerous European concerns that fit the bill.
In the business-to-business sector, a pair of German companies, Deutsche Post AG and SAP AG, serve as prime examples. The former is the world's largest courier company and most recognizable through its DHL brand, while the latter is a leader in e-business applications and enterprise management software, and one of the largest software companies in the world.
There are also companies that help governments operate more efficiently by reducing costs, such as Capita PLC. It is the largest business outsourcing company in the United Kingdom and has a mix of clients in the central and local government — and private — sectors.
In the health care arena, we can look to Fresenius SE & Co. KGaA, a German firm with a 100-year history that provides products and services for dialysis as well as other facets of inpatient and outpatient medical care, and Sodexo Inc., a French multinational supplying food service and support service to hospitals and other sectors.
In my opinion, the companies mentioned above aren't short-term trading ideas but high-quality, sound long-term-growth companies, regardless of a dull economic environment.
There will also be a small uptick in growth rates this year.
Already there are early signs that China is improving, and that is likely to spur all of Asia. I also think that European economies will be, at worst, less bad and at best, better this year.
The United States should also improve, especially now that the fiscal cliff situation is being addressed.
All in all, I expect European equities to continue the improvement trend that began last July. At midyear, the situation was looking pretty grim from a macroeconomic perspective, even if the news from companies never sounded too bad. Even before the July and September progress became clear, I had detected for several months a definite increase in interest for matters European.
This showed that canny investors knew that the valuation discrepancy between bonds and equities was at extreme levels.
The turning point was the European Central Bank's decision to “do whatever it takes” to save the euro and the realization by markets that convertibility risk would be removed. Suddenly, investors could focus on companies and, importantly, valuations.
There will be many hurdles going forward, such as the recent political scare when markets were threatened and investors spooked by the return to politics of Italy's less-than-impressive Silvio Berlusconi. But in spite of inevitable political noise, the reality is that the developed world is on a preset path of slow debt reduction and low growth.
That isn't such a bad environment for the patient investor.
Tim Stevenson is a director of pan-European equities at Henderson Global Investors Ltd.