Consensus continues to expect 13-14% underlying earnings growth for MSCI Europe for 2017. This is in line with expectations at the start of the year, as strengthening economic conditions in Europe have offset the impact of the stronger euro. In contrast, earnings growth expectations for the US market have been revised down by 3% to just under 11% since the start of the year.
The year-to-date move in the trade-weighted euro, if sustained, would have a 2-3% impact on full-year European earnings, based on UBS estimates. Companies so far have been able to maintain double digit earnings growth forecasts for 2017, thanks to better trading conditions and currency hedges. We have focused on investing in companies with strong pricing power as they have flexibility to pass on increasing costs.
The strengthening euro and signs of improving European economic growth suggest that domestic-oriented companies are now more attractive from a bottom-up perspective.
Within the financials sector, for example, we are witnessing improving lending conditions in domestic markets. Austrian banks look attractively valued. They are strategically well positioned given their high exposure to Eastern Europe, where lending remains underpenetrated. We also see opportunities in Ireland and Spain. After the painful rationalisation of the banking industry, conditions are ripe for a reasonable recovery.
Figure 1: Our 4Factor™ screen is pointing towards European financials
Source: Investec Asset Management, 30 September 2017.
Chart shows the sector weights of the top quartile of 4Factor™ scores relative to the 4Factor™ universe.
Despite signs of improvement in a range of European territories and sectors, valuations are still below long-term through-cycle averages. Figure 2 compares the cyclically-adjusted price/earnings ratio (using ten-year average earnings) for the US and European equity markets, with their long-term averages.
The US benchmark tends to attract a premium. This reflects its high weighting in technology stocks, lower weighting in commodities and the greater propensity of US companies to return cash via buybacks rather than dividends. Nevertheless, MSCI Europe is also at a discount to its own long-term average, suggesting that it has not yet fully factored in the potential for earnings recovery in the region.
Figure 2: European valuations on cyclically-adjusted basis shows value*
*Source: UBS European Equity Strategy, 5 October 2017. MSCI European Economic and Monetary Union (EMU) vs. MSCI USA, both USD.
*Internal parameters subject to change without notice.
Past performance is not a reliable indicator of future results, losses may occur.
Geographic / Sector: Investments may be primarily concentrated in specific countries, geographical regions and/or industry sectors. This may mean that the resulting value may decrease whilst portfolios more broadly invested might grow.
Currency exchange: Changes in the relative values of different currencies may adversely affect the value of investments and any related income.
Equity investment: The value of equities (e.g. shares) and equity-related investments may vary according to company profits and future prospects as well as more general market factors. In the event of a company default (e.g. bankruptcy), the owners of their equity rank last in terms of any financial payment from that company.
The information may discuss general market activity or industry trends and is not intended to be relied upon as a forecast, research or investment advice. The economic and market views presented herein reflect Investec Asset Management’s (‘Investec’) judgment as at the date shown and are subject to change without notice. The value of investments, and any income generated from them, can go down as well as up and will be affected by changes in interest rates, exchange rates, general market conditions and other political, social and economic developments, as well as by specific matters relating to the assets invested in.
There is no guarantee that views and opinions expressed will be correct, and Investec’s intentions to buy or sell particular securities in the future may change. The investment views, analysis and market opinions expressed may not reflect those of Investec as a whole, and different views may be expressed based on different investment objectives. Investec has prepared this communication based on internally developed data, public and third party sources. Although we believe the information obtained from public and third party sources to be reliable, we have not independently verified it, and we cannot guarantee its accuracy or completeness. Investec’s internal data may not be audited. Any decision to invest in securities or strategies described herein should be made after reviewing the prospectus and conducting such investigation as an investor deems necessary and consulting its own legal, accounting and tax advisors in order to make an independent determination of suitability and consequences of such an investment. This material does not purport to be a complete summary of all the risks associated with this Strategy. A description of risks associated with this Strategy can be found in the Prospectus or other disclosure document for the fund or Strategy. Copies of such documents are available free of charge upon request. Investec does not provide legal or tax advice. Prospective investors should consult their tax advisors before making tax-related investment decisions.
There is no assurance that the persons referenced herein will continue to be involved with investing for this Strategy or Fund, or that other persons not identified herein will become involved with investing assets for the Manager or assets of the Strategy or the Fund at any time without notice.
Any description or information regarding investment process or strategies is provided for illustrative purposes only, may not be fully indicative of any present or future investments and may be changed at the discretion of the manager without notice. References to specific investments, strategies or investment vehicles are for illustrative purposes only and should not be relied upon as a recommendation to purchase or sell such investments or to engage in any particular Strategy. Portfolio data is expected to change and there is no assurance that the actual portfolio will remain as described herein. There is no assurance that the investments presented will be available in the future at the levels presented, with the same characteristics or be available at all. Past performance is no guarantee of future results and has no bearing upon the ability of Manager to construct the illustrative portfolio and implement its investment strategy or investment objective.
The target is based on Manager’s good faith estimate of the likelihood of the performance of the asset class under current market conditions. There can be no assurances that any Strategy or Fund will generate such returns, that any client or investor will achieve comparable results or that the manager will be able to implement its investment strategy. Actual performance of investments and the Fund or Strategy overall may be adversely affected by a variety of factors, beyond the manager’s control, such as, political and socio-economic events, adverse changes in the interest rate environment, changes to investment expenses, and a lack of suitable investment opportunities. Accordingly, Performance Targets may be expected to change over time and may differ from previous reports.
Specific Portfolio Names
References to particular investment or strategies are for illustrative purposes only. Unless stated otherwise, the specific companies listed or discussed are included as representative of the Strategy or Strategies. Such references are not a complete list and other positions, strategies, or vehicles may experience results which differ, perhaps materially, from those presented herein due to different investment objectives, guidelines or market conditions. The securities or investment products mentioned in this document may not have been registered in any jurisdiction. More information is available upon request.
Indices are shown for illustrative purposes only, are unmanaged and do not take into account market conditions or the costs associated with investing. Further, the manager’s strategy may deploy investment techniques and instruments not used to generate Index performance. For this reason, the performance of the manager and the Indices are not directly comparable.
If applicable MSCI data is sourced from MSCI Inc. MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indices or any securities or financial products. This report is not approved, endorsed, reviewed or produced by MSCI. None of the MSCI data is intended to constitute investment advice or a recommendation to make (or refrain from making) any kind of investment decision and may not be relied on as such.If applicable FTSE data is sourced from FTSE International Limited (‘FTSE’) © FTSE 2017. Please note a disclaimer applies to FTSE data and can be found at www.ftse.com/products/downloads/FTSE_Wholly_Owned_Non-Partner.pdf