Investment Strategies

Embrace quality growth in Europe

"Fiscal retrenchment' has crucial implications for finding companies that are part of the solution

Jan 6, 2013 @ 12:01 am

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.

HOMEWORK ASSIGNMENT

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.

SMALL UPTICK

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.

0
Comments

What do you think?

View comments

Recommended for you

Upcoming Event

Apr 30

Conference

Retirement Income Summit

Join InvestmentNews at the 12th annual Retirement Income Summit - the industry's premier retirement planning conference.Much has changed - and much remains to be learned. Attend and discuss how the future is full of opportunity for ... Learn more

Featured video

Events

Dynasty's Penney: Top RIA trends for 2018

What's next for RIAs? Dynasty's Shirl Penney talks about the growing numbers of entrepreneurial advisers. Plus, what inspired his own entrepreneurship.

Latest news & opinion

Meet our 2017 Women to Watch

Introducing 20 female financial advisers and industry executives who are distinguished leaders, advancing the business of providing advice through their creativity and hard work.

Raymond James executives call on industry to keep broker protocol

Also ask firms to pay for the administration of the protocol to 'ensure its longevity and relevance.'

Senate committee approves tax plan but full passage not assured

Several Republican senators expressed reservations about the bill, and the GOP cannot afford too many defections.

House passes tax bill, focus turns to Senate

Tax reform legislation expected to have more of a challenge in upper chamber.

SEC enforcement of advisers drops in Trump era

The agency pursued 82 cases against advisers and firms in fiscal year 2017, down from 98 the previous year.

X

Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print