For Europe, 2017 began with political uncertainty clouding the investment outlook. While many of these marcro worries have been assuaged, it looks like 2018 will start in a similar vein.
Despite this, expert investors are broadly positive on the region; the economy is improving, earnings upgrades are coming through and headwinds are fading.
After the shock political results of 2016 – think Brexit, Trump – elections in Continental Europe this year caused initial concern. However, one by one the populist parties were seen off – Mark Rutte triumphed in the Netherlands, Emmanuel Macron won France and Angela Merkel retained power in Germany.
While Marine Le Pen, leader of the National Front, losing the French election came as a relief for many, it was no surprise to others. “I thought the likelihood of Le Pen winning was pretty remote,” says Ollie Beckett, manager of the TR European Growth Trust (TRG).
Now, it is the troubles in Catalonia causing headaches, but compared to the UK and US “Europe seems like an area of relative stability”, says Mark Page, manager of the Bronze rated Artemis European Opportunities fund.
Instead, investors should focus on the positives. “What you’ve seen this year is a catch-up trade happening in Europe,” Beckett explained. “The European economy has picked up, China’s stopped exporting deflation and [European companies have] had more pricing power.”
European company fundamentals are also picking up. In previous years, analysts in Europe had started bullishly on earnings per share growth on the continent before lowering expectations as the year progressed. This year they have continued to raise their forecasts. “This is a clear and positive change,” says Page.
“The biggest earnings growth you’ve seen this year has been coming from Southern Europe,” Beckett adds. “My portfolio will see earnings growth of 20% this year.” It's set to be the first full year of expansion in earnings for Europe’s companies on aggregate for six years.
Now investors are more relaxed on the political front, continues Page, they can refocus on the underlying attractions of European companies.
Below, we highlight a few new portfolio additions both managers have made in recent times.
XXL (XXL)
Beckett describes Scandinavian sports retailer XXL as “a bit like Sports Direct (SPD) in pricing". However, "if you walk into the shop it’s actually quite a pleasant experience and their customer service is good”. It continues a slight theme of sports retailers for the portfolio, as TRG has also had success with big brand name Puma.
It’s cheap, he adds – a pre-requisite for his stock selections, as his trust has a value bent. Since hitting an all-time closing high of 112.50 Norwegian Krone last October, it bottomed out in August at NOK71.25, a third lower. It's since started to retrace those losses, at NOK85 currently.
Indel (INDB)
One “interesting, niche company” Beckett likes is Indel. While it’s a firm many will never have heard of given its market cap is less than €200 million, it’s rocketed 38% since listing in May, currently trading hands for €35.
IndelB makes equipment for recreational vehicles as well as producing and supplying mini bars for hotels and cruise ships. While most people would baulk at the prices charged for items, “every room in a hotel has a mini bar”, meaning it’s an interesting market to be in.
Refresco (RFRG)
Page says he recently added soft drinks bottling company Refresco after shares weakened due to a negative market reaction towards its $1.25 billion acquisition of the bottling activities of Canada-based Cott Corp (BCB).
But he says the deal will give Refresco “the national coverage and strategic footprint that it needs in a very attractive, fragmented market”.
It’s been the target of a takeover itself this year, but Page says the €1.6 billion offer from private equity group PAI “undervalues the long-term growth prospects of Refresco”.
Since a low of €15.77 in early September, the share price is currently 25% higher at €19.80.
