At today's Association of Investment Companies (AIC) Conference for Directors, there was much discussion about the outlook for the Eurozone.
The tail risk of disintegration appears to have reduced, but uncertainty remains.
Despite this, the European investment company sectors have staged something of a comeback over the last year. The Europe investment company sector is the top performing sector over the year to 31 January 2013, up 30% in share price total return terms, compared to a 12% increase in the average investment company. The European Smaller Companies sector also performed well, up 27% (see tables for longer-term figures).
Tim Stevenson, Manager, Henderson EuroTrust and panel member at today's conference on ‘where now for the Eurozone?' points out that this strong performance goes "some way towards highlighting the massive difference between what is happening at the macro economic and political level in Europe, and what and how European companies are performing."
Re rating for European sectors
Certainly market sentiment has reflected the strong performance of the European investment company sectors. The average Europe investment company sector discount now stands at 7% (in line with the wider investment company sector average discount), compared to 12% a year ago - a considerable narrowing.
Similarly, the European Smaller Companies investment company sector now stands on an average discount of 11% compared to 18% a year ago.
Challenges remain
Sam Morse, portfolio manager, Fidelity European Values PLC said: "While not expensive, by historical standards, the European equity market is certainly not as cheap as it was a year ago. Share prices have risen handsomely but aggregate dividends paid by European companies have fallen marginally, such that the benchmark dividend yield is now only at a small premium to longer-term averages.
"If the market is going to continue on an upward path then dividend growth will have to resume. Such growth may prove elusive because longer-term issues such as de-leveraging, rising unemployment and fiscal austerity, in some countries, will continue to restrain earnings and dividend growth in Europe. Elections in Italy and, later in the year, in Germany may well cause some uncertainty too, both for businesses and investors.
"Optimists will point out that there has, lately, been an improvement in business confidence which may, in time, lead to a pick-up in investment, employment and economic growth. Commentators are also becoming more optimistic about the outlook for growth in important economies such as the U.S. and China, which would certainly benefit those European-listed companies that derive much of their revenues from outside Europe. Private clients and savings institutions still hold large balances in cash and bonds; some of this may find its way into equities, if the outlook for growth improves.
"What about the Eurozone crisis? Is it really all over? So far Draghi's words have done the trick, in terms of reducing the tail-risk of a Euro-zone disintegration, with no real action or "OMT" required but there is, of course, still a risk that complacency sets in such that much needed progress on structural reforms and deficit reduction is deferred, risking the possibility that the sovereign debt crisis returns rapidly if global growth stalls again.
"Against this backdrop, the fund remains focused on attractively-valued companies, with sound balance sheets, which can deliver consistent dividend growth even if European economies remain challenged."
Sam Cosh, Lead Manager of the European Assets Trust, F&C Investments said:
"The mindset of investors is slow to change, as seen by the fact that European equity funds were experiencing outflows in aggregate as recently as November. It had become fashionable to be as pessimistic as possible and anticipate ‘Black Swans' at every juncture. It is during times like these that you can buy assets cheaply and make the best returns over the long term.
"Despite the rise in equity prices since the summer, European equity remains a neglected asset class, trading at a significant discount on both a relative and absolute basis, which provides excellent investment opportunities. These opportunities are most attractive within the diverse and poorly understood small and medium sized company market."
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