“The outlook for Europe at a market commentator level is generally dominated by political concerns,” said FP Argonaut European Income Opportunities Fund manager Gregg Bennett.
“However, if you look at what is going on economically and stock market-wise, it is a completely different story.”
“Normally, by this time in the year we would have already seen downgrades to the European market.
“This year, we’ve seen upgrades, and not just in a couple of areas but across the board in every single sector. That speaks to the underlying healthier environment for corporate Europe.”
Even downgrades for European financials, the largest contributor to the negative earnings outlook up until six months ago, have ended, which means the “extraneous effects” on other European sectors will be mitigated, Macklow-Smith added.
“Notably banks in the run-up to the stress tests, energy and commodities in the past two years because of falls in product prices and any sector exposed to emerging markets given weak growth in the last three years (which itself was related to the decline in commodities prices).
“This year those extraneous effects are absent so we have ‘clean’ growth across a number of areas.”
And relative to their US counterparts, European stocks are not only cheaper, but they’re also “highly dynamic and incredibly liquid” and “M&A is never a problem,” Bennett continued.
The broadness of the economic activity in Europe is also something that should excite investors.
“No longer do you have to pay up for growth,” he said. “The average company in Europe is able to deliver earnings growth, which is an important difference than what we’ve seen over the last few years.”
European equities also present more value in the level of yield they offer relative to other stock markets, which is increasingly important as inflation across developed markets rises.
“Many people are dissuaded from equities because of the volatility. But now, investors no longer have that certainty of making great and steady capital gains from a fixed income portfolio.
“You have to think twice about that and how you can protect yourself in an inflationary environment. If you pick bonds carefully, you’ll get a coupon, but that’s all you’re going to get.”
