A number of advisers I have recently met see Europe as a bit of an ugly duckling, as it faces the continued prospect of sub-trend growth in 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, in the past 12 months, the FTSE All World Europe ex UK index has returned 34.5 per cent, outperforming all the other major indices. Economic data shows signs of improvement, and the latest manufacturing data was strong with figures from Italy, France, Germany and the overall eurozone coming in ahead of expectations. Second-quarter economic growth 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 per cent of companies in the Stoxx Europe 600 index have met or beaten analyst forecasts. France and Germany have shown particularly strong results with roughly 80 per cent 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 starting from a low base.
We believe that European companies with a clear strategy, strong balance sheet and financial means to invest in their business to increase market share do exist.
One reason Europe’s prospects lag the US is because of how companies raise finance. Banking loans account for 80 per cent of Europe’s corporate financing, compared with approximately 20 per cent in the US.
This is likely to dampen any 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 it is worth considering.
