19 Brexit is on way but there are still op­por­tu­ni­ties for in­vestors on Con­ti­nent

The Herald - - PUZZLES -

WE MIGHT be in the process of ne­go­ti­at­ing our exit from the Euro­pean Union, but look­ing towards the Con­ti­nent from an in­vestor’s point of view, what are the at­trac­tive in­vest­ment des­ti­na­tions across the Chan­nel?

Af­ter the fi­nan­cial cri­sis, the US made very swift changes to its bank­ing sys­tem.

De­spite some high-pro­file bank­rupt­cies like Lehman Broth­ers and Bear Stearns, the re­main­ing fi­nan­cial in­sti­tu­tions re­struc­tured very quickly.

This was helped by a va­ri­ety of fac­tors, such as low in­ter­est rates, quan­ti­ta­tive eas­ing and cap­i­tal raises in the mar­ket.

But, most im­por­tantly, the quick write-off of bad debt helped to re­cover cap­i­tal ra­tios – the amount of cash banks are re­quired keep on their bal­ance sheets – back to ad­e­quate lev­els to leave the cri­sis in the rearview mir­ror.

For both the bank­ing sys­tem and the wider econ­omy in gen­eral, this meant it was al­most back to busi­ness as usual a mere two years af­ter the down­turn.

Banks started lend­ing again, com­pa­nies and con­sumers to a cer­tain ex­tend in­creased their bor­row­ing and the econ­omy moved back to an even keel.

Move across the At­lantic and it is a very dif­fer­ent pic­ture.

Euro­pean in­sti­tu­tions were very re­luc­tant to write off bad debt and this did not sit well with the Euro­pean reg­u­la­tor.

Equally, the Euro­pean Cen­tral Bank was very late to ini­ti­ate a quan­ti­ta­tive eas­ing pro­gramme.

Loan growth orig­i­nally picked up in 2011 only to turn neg­a­tive again towards the end of 2012 and into 2013.

Euro­pean in­sti­tu­tions were hes­i­tant to lend to the pri­vate sec­tor, which in turn was re­luc­tant to in­crease in­vest­ments.

As a con­se­quence, Euro­pean GDP turned neg­a­tive again in 2013 af­ter the ini­tial re­cov­ery post the fi­nan­cial cri­sis.

In fact, look­ing at GDP lev­els for 2016 ver­sus 2009 the US man­aged to grow by 29 per cent while the EU’s GDP in­creased by 18 per cent.

There are more fac­tors driv­ing the stock mar­ket per­for­mance than just GDP growth, al­though it is a big in­flu­encer. Fur­ther­more, when com­par­ing US and EU stock mar­ket re­turns since the lows of 2009, we see a big dis­crep­ancy: 212 per cent for the Dow Jones ver­sus 87 per cent for the Stoxx Europe 50.

Europe has a lot of catch­ing up to do, and it looks like it is fi­nally hap­pen­ing. The im­ple­men­ta­tion of quan­ti­ta­tive eas­ing, fur­ther bank re­struc­tur­ing and im­prov­ing Euro­pean con­sumer con­fi­dence are all con­tribut­ing to a more pos­i­tive out­look.

This is re­flected in lead­ing in­di­ca­tors such as IFO busi­ness ex­pec­ta­tions, ca­pac­ity util­i­sa­tion and bank lend­ing pick­ing up.

Hav­ing an­a­lysed com­pa­nies’ prospects over the long term, typ­i­cally fore­cast­ing out five years, there are three main rea­sons why we find Euro­pean shares more at­trac­tive than their US coun­ter­parts at the mo­ment.

First, they tend to have a higher rev­enue dis­tri­bu­tion in Europe and there­fore bet­ter sales prospects.

Sec­ondly, they have more re­struc­tur­ing op­por­tu­ni­ties left as they started later in the cy­cle and this should lead to bet­ter mar­gin pro­gres­sion.

And, fi­nally and most im­por­tantly, val­u­a­tions, which are at the heart of ev­ery in­vest­ment de­ci­sion we make, are more at­trac­tive.

At present, Euro­pean shares trade at a larger dis­count than nor­mal to US shares.

While this was jus­ti­fied for most of the last decade, we feel that in the cur­rent en­vi­ron­ment this dis­count should close.

We have put this into prac­tice in the TB Global In­come & Growth Fund, which owns shares in Ger­man chem­i­cal com­pany Evonik, French build­ing ma­te­ri­als com­pany Saint Gobain, French elec­tri­cal equip­ment maker Sch­nei­der, Swedish bank Han­dels­banken, Swiss bank UBS and, since its re­cent IPO, Al­lied Ir­ish Bank.

We be­lieve Europe of­fers plenty of at­trac­tions, not least the pick-up in eco­nomic growth, self-help for com­pa­nies and reval­u­a­tions.

What’s not to like?

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