Europe still favoured for yields and international firms

Singapore

EVEN as the possibility of a Greek default remains alive, Europe remains a buying opportunity due to its relatively high dividend yields and its international companies, a couple of fund managers have told The Business Times.

Dividend yields at 3.5 per cent are the highest among developed economies. European corporates get two-thirds of their earnings from outside the eurozone, and will get a boost from a weak euro, they said.

Paras Anand, Fidelity's head of pan-European equities, has argued that Greece's current negotiations with its debtors represent the peak of the appeal of populist parties in Europe. If Greece manages to stay in the Eurozone because the anti-austerity Syriza party makes some concessions, people will be disillusioned. "Very few parties can deliver on expectations they come into power with," he said.

If Greece exits the eurozone due to a Syriza hardline stance, with the expected catastrophic economic consequences in the short-term, voters from other economies will not see the exit as a positive outcome, he said.

In any case, one key argument for European stocks is low earnings growth expectations in the year ahead of about 6 per cent, compared to the global average of 8 per cent and the US average of 10 per cent, Mr Anand added.

Earnings could surprise positively from higher corporate activity, the positive impact of a lower euro, and if companies have pricing power that will enable them to maintain their revenues - even as costs fall from a deflationary environment, he said.

Large companies in developed economies have healthy balance sheets and surplus cash to pursue activities such as mergers and acquisitions and divestments, which improve value for shareholders, he said. Meanwhile, the beneficial effects of a weaker euro will take time, given hedges are in place, but will eventually come through.

"Even without a substantial economic pickup, Europe earnings can surprise positively," said Mr Anand.

Ann Steele, a senior portfolio manager at Threadneedle who manages its pan-European fund and other mandates, said the market has not fully priced in the tailwinds from a lower oil price and a weaker euro.

She said she favours consumer discretionary stocks and those of media and publishing stocks companies, such as BMW, Continental, Richemont and Pearson; she also likes insurance and financial services stocks such as the London Stock Exchange, which is selling its asset management arm, Russell Investments. Russell is best known for its Russell 2000 US small-cap index.

"The beauty about Europe is there are lots of international companies ... We still like (consumer goods giant) Unilever and (construction equipment rental firm) Ashtead," she said.

Ashtead gets 85 per cent of its revenues from the US market, which is undergoing some consolidation. The company can increase prices with less competition, and will also benefit from a stronger US dollar, she noted.

She is looking at mid-cap companies that have lagged the market.

"I look for the cash that a company generates and whether management spends the cash wisely; I also look for companies with good-quality franchise power," Ms Steele said.

Fidelity's Mr Anand said he likes German software firm SAP, saying the company can survive industry change through the strength of its customer relationships. He also likes another German company, Volkswagen, which owns car brands such as Porsche and Audi.

He is avoiding "bond-like" stocks trading at extreme valuations. At high valuations, modest changes in perception will result in a big move, he warned. "The market is paying a very high price for safety," he said.

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