There are two sides to Europe at present, says Nigel Bolton, head of European equities at BlackRock, before listing off all the woes of countries like Greece, Italy and Spain. But what's important for investors is to not get hoodwinked into confusing economies and companies. Rather, pinpoint those European companies that offer attractively-priced valuations by focusing on cash flow and managers that run the company in the best interest of shareholders.
On a price-to-book ratio Europe looks cheap relative to the rest of the world, Bolton says. On the basis of equity yield relative to bond yield, equities in Europe are yielding more than their corporate bonds. For example, Nestle has a 3.8% dividend yield, while its corporate bond with 2018 maturity carries a yield of just 0.35%. That's a striking difference. Yet where are investors ploughing their money at the moment? Corporate bonds. With newspaper headlines dominated by sovereign debt woes, investors have been seeking out corporate bonds yet stock picking equities can earn you far more income, is among Bolton's key points. Yes, you will have more volatility in the equity rather than the bond, "but I will bet any man here on a 5-year view that you will make much more money out of that equity than out of its bond," Bolton challenges the audience at the Morningstar Investment Conference.
"On a long-term view, buying now [European equities] is a very, very sensible thing to do," Bolton confidently states, noting that stock selection is becoming increasingly important within the region.
To highlight how investors shouldn't be fearful to go against the market noise. Bolton quotes Warren Buffett's famous phrase, "Be fearful when others are greedy; be greedy when others are fearful." You don't hear the newspapers talking about fears around investing in Royal Dutch Shell, for example, but you do hear constant updated on fears surrounding the ECB and its ability to address sovereign debt.
Similarly, while the situation is dire in Europe and it's been a main topic of conversation for years now, Ireland has actually put in the third strongest performance of the global stock markets in the 12 months to end-March, Bolton points out, after the Philippines stock market in first and the Nasdaq in second place. Ireland has in fact been the top performer in Europe over the past year, with a return of 5.9% at last check, while the UK is currently down 7% and the US market is roughly flat with a fall of 0.8%.
So that's the good side, but on the bad sad there are some stand-out areas of concern for Bolton. "Ultimately, my personal belief is that Greece won't make it," he says. The problem with Greece: is what do they export? "They've got sunshine and they've got some very nice beaches but the trouble is that to go there it's got to be cheap". And it's got very expensive recently. Greece needs to undergo deflation to make it competitive against the rest of Europe and the rest of the world, Bolton believes, and as such he sayd "Greece is pretty uninvestable." Bolton does not have any exposure to Greece.
Meanwhile Italy, which also features in negative headlines on a regular basis, is actually "on the road to recovery" in Bolton's eyes. "It used to be a joke that you could retire after the age of 50 if you worked in the civil service in Italy but retirement age has gone up to 68 and it's now index-linked to longevity," Bolton says to exemplify the tight new regime that Italy has brought in to deal with its economic situation. Bolton is confident that Italy is a long way down the road to sorting out its economic situation. In fact, he belives Italy is in a much better position than Spain (and a completely different situation to Greece). "Domestic companies in Spain are pretty much uninvestable." Rather, within Spain, the opportunities lie with companies that generate revenues beyond Spanish borders.
In conclusion, while the politics are still very much leading the markets and the future remains unknown, there are still some great 'quality' names to be found for stock pickers, particularly those companies that are either tapping into a specific trend such as the middle class growth story (Richemont, for example) or those that have exposure outside of Europe. "I see fear, I see people saying they don't want to invest in Europe because it's a mess, but there are some really attractive valuations out there," Bolton sums up.
Follow the conference live on Twitter #MICUK2012 or download the app to ask questions directly at www.micuk12.co.uk.
