Despite the bumpy start to the year in global equities, Investec has not changed its fundamental view for a recovery in European corporate earnings, and it remains cautiously optimistic about the outlook for European equities.
As Figure 1 indicates, expliains Ken Hsia, portfolio manager at Investec European Equity Fund, European companies have not seen the same recovery in their ROE as their US counterparts. And despite seeing a drop in the ROE of the MSCI Europe in recent months, largely due to declining returns from the resources sector, we believe they should continue to close the gap. “While increased instances of consolidation across some industries has helped to unlock cost synergies, merger & acquisition (M&A) activity in Europe has been slow compared to the US”, points out.
Furthermore, as a net consumer of oil, says, Europe is set to bene t from lower global commodity prices and this tailwind should help to support a gradual recovery in the European economy.
Those are current investment themes in the Investec European Equity Fund:
1. Global winners
Investing in Europe means investing in European expertise and not countries. Europe is home to many world class companies with strong competitive advantages, which we believe give them strength in any global economic environment.
Pernod Ricard SA - As the second largest spirits company in the world, they have strong market positions. This, coupled with the aspirational nature of its product portfolio, has led to strong returns.
2. Exposure to Europe and seeing less competition
Country reforms in recent years have provided a strong basis for stability in the region. We are seeing European exposed companies gaining more market share as consolidation across some industries has helped to unlock cost synergies.
Michelin - Second-largest tyre manufacturer in the world that is undergoing an ef ciency programme to boost returns. Additionally, demand for SUV tyres, which have better margins, is on the increase.
3. Knowing what to avoid
Investec constructs its portfolios from the bottom-up, as such we are able to selectively capture investment opportunities. This adaptable nature also means we are able to avoid challenged industries, enhancing the potential to outperform.
“While our bottom-up portfolio construction process allows us to avoid challenged industries. It also means we monitor good European companies that are becoming cheaper due to current market environments”, concludes Hsia.