Global portfolio managers say Europe, especially its peripheral countries, is the region most likely to reward investors in 2016.
Alan Chua, global equities portfolio manager at Franklin Templeton, cited companies’ ability to cut costs – particularly wages – and the weak euro as supporting the region’s export competitiveness.
This is helping countries such as Greece and Portugal – the markets at the heart of the eurozone crisis that began in 2010 – move their balances of payments to healthier positions, with current-account deficits turning into surpluses. “The last time Greece had a current-account surplus was in the 1950s,” Chua said, speaking to an AsianInvestor institutional investment conference in Singapore last week.
James McDonald, Chicago-based chief investment strategist at Northern Trust, also highlighted investment opportunities in Europe. Compared to the US and Japan, European companies offer lower valuations and higher dividends.
“The European economy is most likely to show upside surprise,” McDonald said. “There’s more pent-up demand” there than in the US or Japan, which will fuel a modest but durable recovery across the eurozone.
Earnings per share for US companies are at an all-time high, while EPS for Europe are moderate, Chua said. Europe also compares favourably in terms of price-to-book valuations and the ratio between stock index levels and earning trends.
Divergence between the two markets has become irrational, he added. Comparing ExxonMobil and Royal Dutch Shell, Chua said: “Both are oil companies owning assets denominated in US dollars, but the US-listed company is much more expensive than the one from Europe. It makes no sense.”
The outlook is also seen to be brightening for European property, especially in periphery countries. Gunnar Herm, head of European real estate research and strategy at UBS Asset Management, said property stocks were due to perform well because landlords could now charge higher rents.
For example, city-centre vacancy rates on the continent have fallen over the past few years, as consumers gradually fill up the shops. German retail sales, for example, grew by 4% in 2015, the highest rate of retail growth in the country since 1991. Herm is not so keen on London, however, where rents are already high and new supply is coming on line.
Economic recovery is creating new investment opportunities in unexpected places. For example, logistics centres in Spain and Italy are attractive because e-commerce is finally starting to take off in those places, said Herm. In addition, property developers are starting to take advantage of new sources of financing to reduce borrowing costs, as capital markets evolve to challenge the dominance of bank lending.