We asked Rob Burnett, Head of European Equities for Neptune and manager of their European Opportunities Fund, which corners of the equity market are to benefit further from a sustained European recovery.
While European equity prices have risen substantially over the past two years, including those in peripheral Europe, Burnett points out that domestic demand in southern Europe has only started to recover during the past year.
“Southern Europe is in a much earlier investment cycle than the rest of the developed world, allowing for longer above-trend GDP growth. Lower bond yields and lower unit labour costs are driving a ‘competitiveness-led’ recovery that we believe can generate good returns.”
Deceptive valuations
“There has been a lot of comment about the high valuations within peripheral European equities, typically citing the price-to-earnings (P/E) ratio for 2014. But the P/E ratio of peripheral European equity markets in 2014 is bound to be high. These countries have been through a massive recession where earnings have
been decimated. If you look at the 2015 or 2016 P/E ratio, then peripheral European markets look better value as some of the earnings recovery is beginning to come through.”
“Better still, focus on the price-to-book (P/B) ratio, where you ignore the cyclicality of earnings. Analysing the P/B of European indices relative to their own pre-crisis averages, Greece, Italy and Spain are extremely cheap. This is particularly true of parts of the financials sector. Southern Eurozone banks are the cheapest sub-sector on both P/E and P/B metrics, whilst they also offer the highest earnings-per-share (EPS) growth.”
