When investors look offshore for investment opportunities, Europe tends to take a back seat in comparison to countries such as the US, China or India.
However, Fidelity International senior investment consultant Peter Holland believes the region can provide the perfect complement to investments in these more popular markets.
Countries like the US, China and India have attracted investors’ funds on the strength of their economic growth, however, Europe’s appeal is completely different, according to Holland.
“You’re not going to buy Europe for the economic growth. Why you are going to buy Europe is that the companies on the whole are well managed.
“The companies have done a lot since the 2000 crash to improve their operations, look after shareholders, run the businesses tighter, and produce much more cash flow with good dividend growth. So you’ve got this resurgence in profitability based more on good management and less on economic recovery and growth,” he said.
The push towards better management of companies has come about through the entry of new members into the European Economic Community, such as Poland and the Czech Republic, Holland said.
He explained that typically what happens is companies in these new member countries enter the market with a lowly paid but well-educated workforce, and companies in the established European countries find themselves in a market with competitors who can produce the same goods at a lower cost. This situation has forced a change in operating structures.
Holland said the emphasis on profitability means good opportunities for investors to buy European stocks at relatively low prices.
“The result of that is profits have gone up a lot and European equities are actually very cheap. At the same time, we know that equity investors in Europe are pretty negative.
“So it seems to me that you have a situation where the market is cheap, the traditional buyers are all a bit shell-shocked after the 2000 problem … and there is a great opportunity to buy cheap investments with good dividend yield at a time when others don’t want it,” he said.
Holland believes in this type of environment the investor would be advised to steer away from indexed funds in favour of actively managed funds, as there is a real prospect of picking winning stocks.
Because the driver of good returns in Europe is not correlated to those in other international markets, Holland feels investment in the region can increase the diversity of the overseas component of a portfolio.
“If you buy Europe you’ve got a different sort of economic way of making money. It gives you the benefit that if, say, Chinese growth turns out to be disappointing, it really won’t make that much difference to your investment in Europe. So it’s a different sort of investment and in that sense it’s alternative, it lowers the risk of your portfolio because you won’t be so plugged into China or other countries that are driving the rest of it,” he said.
